Currency Update – Wednesday 22nd April

Currency Update – Wednesday 22nd April

The Pound has been on a roller-coaster of highs and lows against the Dollar in the past couple of months, and the fall at the beginning of this week, to 1.45 yesterday from 1.50 at the middle of last week, seemed to have let the Pound's rally to peter out, not unlike Liverpool's title challenge, although with less excitement. Sterling's fall over the past few days has been primarily to do with the drop in risk appetite, helped along by worries over the health of the banking sector in the US, in spite of some better than expected profit announcements from those same banks. The Pound did manage to claw back some of it's gains yesterday, climbing back above 1.46, before falling backwards to sit around that level, as the US Treasury Secretary Geithner moved to shore up US banks' image, by commenting that they had more than adequate capital, a move led banking stocks to recover some of their recent losses, and led to the Pound's recovery.

The recovery wasn't just against the Dollar, with the Pound also climbing back up above 1.13 against the Euro. The single currency also fell back against the Dollar, to around 1.29, in spite of a better than expected German Zew index figure, which showed the highest analyst expectation numbers since June 2007, although that will be based on the very poor baseline of the current economic situation. The Euro may be kept weaker, although still historically strong, by the speculation that the German government is going to revise down it's prediction for GDP 'growth' in 2009 for Germany to -5%, even the ECB rate cut next month is unlikely to give much succour in this event.

Sterling is remaining jumpy today ahead of the UK budget, the news has been full of leaked proposals from the budget, and the papers will be full of speculation and opinion, with the budget always a political as well as economic event. especially the last budget before an election. Focusing on the likely outcome for the Pound on the currency markets, the government will be trying to paint a picture that will look likely to bring public borrowing under control in the coming years, necessary to stave off what would be a disastrous downgrading of the UK's credit rating, without damaging his parties already slim chances in the election next year, or hindering the recovery from the recession. As the budget is extremely unlikely to be fiscally expansive, the country just can't afford it, the likelihood is that the Pound is going to suffer, although being on the backfoot for the past few days, some of that bad news could already be priced in.
As well as the budget, we also have the BoE minutes, and the latest labour figures to give some shape to the day. The minutes will confirm an unanimous decision to keep rates on hold and continue with the QE measures, but they may also give some insight into how the MPC are viewing the effectiveness QE measures. The labour figures are expected to continue the grim reading from previous months with the claimant count likely to climb to around 4.6%, and overall unemployment to continue to rise.

The reaction to the budget today is a big unknown, however with the other economic data likely to be poor, and the government looking to shore up public finances, the Pound is likely to be on the defensive throughout the day.

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