Currency Update – Wednesday 28th January

Currency Update – Wednesday 28th January

It seems that whatever US government can do, the UK government can make a pale imitation of. After the US car makers were given loans of around $50bn, the UK government have announced GBP2.5bn in loan guarantees, although of course this partly reflects the relative size of the car industries within the two countries. I was surprised to hear there were any native car manufacturers left in the UK, but when the names of the companies who are likely to take advantage of the scheme were mentioned it seems the guarantees are to be used by foreign owned firms operating in the UK in a bid to protect jobs; the scheme may not even be enough to do this, with most of the GBP2.5bn likely to be taken up by just a couple of firms leaving the rest to struggle on the best they can.

The announcement of the scheme had little immediate impact on the currency markets, which at the moment are led more by investor sentiment and the prospects of the much, much larger $825bn economic stimulus plan proposed by Obama. The US was hit by a large fall in consumer confidence to a record low, while house prices continued to fall sharply, there was also bad news globally when the IMF report, due out today, was leaked and showed a downgrading of expected worldwide growth from 2.2% to just 0.5%. The news out from the Eurozone was at first sight, mildly positive, with the German IFO survey showing a small rise in it's climate index, and a rise in the economic expectations measure, although with activity already so slow, and Germany only recently entering into it's recessionary phase, the news hasn't given the Euro much support.

With the expectations of the massive economic package coming out of the US, the poor economic data yesterday has not managed to hurt investor appetite, and stocks still managed to climb over the day. The rise in risk appetite is likely to continue the trend from recent days, with Sterling climbing against the Dollar touching 1.43 in this morning's trading and up above 1.0750 against the Euro, which has itself strengthened against the Dollar, to almost 1.33, as investors remove their funds from the US currency and seek returns elsewhere.

It is a quiet day on the data front, at least in UK trading time, with the big event of the day, the FOMC announcement happening after the close of UK trading hours. The decision isn't going to be about rates, as they cannot cut any more than they already have, although there may be some hints as to how long rates will stay at these levels, instead it is likely to focus upon what, if any, 'quantitative easing' measures the US will take. Before the Fed announcement we have the first estimate of German CPI for January, which is expected to show a further drop, although probably not enough to change the thinking on the future of ECB interest rates.

With it being all quiet on the data front, the trend of the week will likely continue, with investor appetite returning, helping give the Pound a lift, especially as there are rumours that the US stimulus plan could be passed as soon as this week.

Michael Corcoran - Assistant Manager  | Treasury Solutions

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