YB Currency Update – Monday 20th July

Continuing last weeks trends, Asian equities advanced overnight, adding to the optimism created by the better than expected US corporate results and positive economic data which softened the Dollar and the Yen last week. How much momentum this swing has may be decided tomorrow and Wednesday as Fed Chairman, Ben Bernanke, gives his semi-annual testimony to congress. Markets will be looking to see what he has to say about prospects for economic recovery, Fed monetary policy, Quantitative Easing, and the need for further government stimulus. GBP/EUR has risen up to around 1.1590 this morning on the back of some weak Producer Price Index figures for Germany, whilst the GBP/USD has continued its rise to the 1.65 mark.

The relationship between global optimism, risk appetite and the resultant investment flows between equities, currencies, commodities and other assets has been well documented on these morning updates, and has accounted for a large part of the movements seen in the FX markets over recent months. With London still remaining the heart of global finance, Cable continues to act as a proxy for global capital markets. There are signs, however, that the currency markets (particularly the Dollar and Yen) may be growing less captive to the whims of the stock indices. Primarily, the VIX, which measures the volatility in the equity markets, fell to a ten-month low last week, indicating that investors are growing less nervous. As the IMF’s report last week pointed out, the rate of improvement for GBP against the Dollar has slowed considerably, and indeed the warning was that the UK authorities run the risk of weakening the Pound if they do not produce a clear plan of action to reduce the nations debt.

While there is no other domestic news of note today, there are plenty of key events later in the week. The tone of the minutes of the July MPC meeting will be important while on the data front the preliminary Q1 GDP data, retail sales, CBI industrial survey and public sector borrowing figures all feature.