YB Currency Update – Tuesday 22nd September

YB Currency Update – Tuesday 22nd September

The comments from the BoE quarterly report continues to weigh on the Pound, at least it does against the Euro which has barely moved against the Euro since yesterday, hovering around 1.1050. The comments pointed to the structural imbalances in the UK economy, and suggested these might lower the long running effective exchange rates for the Pound on the currency markets, even if this is true no-one believes that the long running exchange rate is achieving fair value at these levels against the Euro, and it is instead other factors, such as public sector borrowing, the current account deficit, and perhaps most importantly of all the central banks QE measures. In spite of better than expected industrial and service sector data, the reading of the last UK GDP estimate for Q2, still hangs over the Pound, but the -0.8% drop is likely to be revised to a better figure at the next revision, and the total business investment figures at the end of the week may help, although the Pound will have to endure the MPC minutes tomorrow, before we get there.

With equity markets slightly down, the S&P500 fell 0.3%, and traders looking for a chance to take profit on recent rises in the markets, the Dollar has benefited rising against a broad range of currencies, although not against the Pound, which has bounced back from a low just above 1.61 to trade near 1.63 on this morning's markets. Markets are slightly down, even as the news coming out of America is mildly positive, the leading economic index rose for a fifth consecutive time, which points to the US getting back into positive growth in the 2nd half of the year, at an average of 2.55%. The general view is that equities have raced ahead of market fundamentals and that traders are looking for the chance to take profit, one such trigger would be if the central banks indicate they are removing the fiscal and QE measures in advance of a sustained recovery. This is unlikely to come from the US Fed who are expected to indicate that rates will be staying low for some time, or from the MPC minutes with a large minority of the committee voting for even more QE in the previous release.

The data trail is once again light for the UK, and Europe with nothing released, and even in the US there is only a regional manufacturing survey and the house price index for traders to take a look at. With nothing to give the markets any direction the general mood of nervousness is likely to continue as traders try to 2nd guess what the Fed will say later in the week, which will leave the Pound under pressure.

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