YB Currency Update – Tuesday 23rd June

YB Currency Update – Tuesday 23rd June

Economic forecasts and global equity indices provided the direction for currency markets yesterday, as spooked investors came crawling back to the US Dollar in the face of heightened risk aversion. The World Bank revised its growth forecasts for 2009-2010 downwards, predicting a sharper fall this year, and a shallower upturn next year to its previous estimates. The Eurozone is now expected to contract a stark 4.5% (previously -2.7%) this year, whilst the US economy will shrink by 3.0% (2.4% previously). Stock markets slumped on the back of this, with the FTSE closing 2.5% down, the DAX 3% down, and the S&P 500 down 3%. All of this combined to push the Dollar higher as its safe haven attractiveness returned. GBP/USD fell from a peak of 1.65 yesterday morning and is currently trading around the 1.6250 area. Early on, GBP/EUR briefly touched 1.19 before the drop in UK sentiment pushed it back down to just under 1.18, the drop continuing this morning to under 1.17. This still leaves the Euro on track for a fall of 8% against the Pound for the quarter, its biggest since the single currency was introduced.

The recent revision to the optimistic tones of the last few weeks has also hurt other markets too, with commodities as well as equities taking the hit as investors move to more stable assets -  given, however, that the rally in commodity prices had clearly preceeded global growth, profit-taking here is not surprising. There is also rising expectation that  the major governments may wait longer before begining to reverse some of the monetary policy measures introduced to combat the recession. For instance, amongst the worst-performing currencies yesterday was the Aussie Dollar, which lost ground after an opinion piece argued that the next move in interest rates would be down. Across other major economies, where previously markets were pricing in at least the start of the rate-rising process by the end of the year, this is now less certain.

There are no major data releases for the UK today, and the focus will be on international releases and risk appetite. This morning we have had PMI data (services & manufacturing) for the Eurozone and Germany which have come in marginally lower than expected, and a raft of housing data for the US is due later on.

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