YB Currency Update – Monday 1st June 2009

YB Currency Update – Monday 1st June 2009

It may the almost perfect weather over the weekend, but the optimistic mood has continued into this week, boosted by another reading of house prices which seems to indicate prices rising, although with activity so low, but picking up, there is bound to be a little volatility. Japanese industrial production, up 5.2%, and German retails sales, up 0.5%, have kept the run of good economic news going and stock markets have responded, rising again with the S&P up 1.36%, while markets in the far east rose by the same amount. The rising stock markets have once again led to a dollar decline, allowing the Euro to push up past 1.42 against the US currency. There was some trepidation a few month back that when the Dollar started to fall, the Euro would rise up against it faster than the Pound causing the GBP/EUR rate to fall correspondingly, fortunately this hasn't happened and the Pound has also made strong gains against the Dollar, and over the weekend it has continued it's strong rally pushing up towards 1.64.

The Pound's recovery against the Euro has been more muted than it's rise against the Dollar (May was it's strongest month against the USD in over 20 years), although it has climbed around 13c since the start of the year, at around 1.15 it is still low by historical standards. Since the aberration around the turn of the year when Sterling was down near parity, the Pound has been recovering against the Euro, knocked back by the announcement of QE measures by the BoE. The ECB haven't followed suite in spite of an economy as weak as the UK's and an inflation rate which is actually falling faster. The first flash estimate of the latest CPI figure shows a rate of 0%, compared to the UK's of over 2%, and there is a possibility that at the ECB meeting on Thursday something might change. There has been some conflicting statements coming from ECB members, and although the ECB have recently outdone even the BoE in their conservatism, at some point this is likely to change, and when it does the Euro is likely to suffer.
                                          
June starts with a series of Purchase Manager Index releases for the UK, starting today with manufacturing, then tomorrow with construction, and on Wednesday services; the releases are expected to be in line with the general upticking of activity over the past few months and should be Sterling supportive. On Thursday we have the ECB meeting, already mentioned above, and the MPC, which are unlikely to change a thing while they wait for past actions to take their effect on the market. Friday brings us the Non-farm payrolls from the US, this is expected to show a fall of over 500k, which is actually slightly less than previous months, and any decrease in the number of job losses will be seen as supporting the optimistic mood.

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