YB Currecy Update – Thursday 15th October

YB Currecy Update – Thursday 15th October

It was a busy day on the markets yesterday with a lot of economic data released, and the start of the US corporate earnings season, providing some volatility. It was the banks who have released their reports first and they have come in much above expectations with JP Morgan announcing a dividend of 83c per share, beating forecasts and casting doubt on the previous assumptions that the stock markets had got ahead of the fundamental value of the underlying earnings on their shares. JP Morgans announcement of $3.6bn profits in Q3, comes at the same time as Goldman Sachs, Citi bank, and  Bank of America are all expected to announce bumper revenues, and, to the outrage of the media, also announce large bonus pools. Banking is not doing quite so well in this country with Lloyds group looking to raise a further 25bn of equity, of which they hope the government will pony up 5bn, immediately cancelling out the 3bn Lloyds have already paid back of the 17bn the government had to pump in to bail it out in the first place. The rise in JP Morgan's earnings have helped sentiment in the US and the Dow Jones has risen above 10,000, a strong rally since falling below 6,500 earlier this year.

The rise in US stocks itself would be enough to weaken the Dollar purely on a risk appetite basis, but the effect was compounded by the latest FOMC minutes which showed that the Fed were actually considering extending their QE program, while the markets were thinking about when they would start to reign it in. The talk of QE had the expected effect on the Dollar, sending it tumbling; the Euro has climbed above 1.4925, and even Sterling, the markets whipping boy, has managed a strong rally against the Dollar pushing up to around 1.6150 in this morning's trading.

The Pound's rally against the Dollar is not just due to the USD weakness, but also on a bit of Sterling strength. One of the factors in Sterling's recent slide has been the perception that the BoE has been content with a lower Pound and has even been actively talking down their currency, in recent interviews some BoE employees have sought to fight this view, and although it may have reassured the markets, there is still the prospect of a further extension of QE measures in the near future which will weigh on the Pound; however those interviewed have instead focused on the withdrawal of the QE program in the medium term to fight inflation, and when this was coupled with lower than expected unemployment figures, which have kept the rate below 8% for now, the Pound has been given a boost, rising not just against the Dollar, but also clawing back some ground against the Euro back up above 1.08.

After the excitement of yesterday, the UK data release takes a bit of a break, and instead we get the Eurozone CPI figures, expected to stay weak with a strong Euro putting downward pressure on prices. This afternoon there is a batch of regional surveys released in the US, along with their CPI figures, which are also expected to stay weak, although the Dollar's slide may put some upward pressure on import prices.

The Pound has put in a strong rally over the last 24 hours, but it looks like it might have paused for breath this morning, and with no data to give it a further boost there could be a pause in the rally.

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