YB Currency Update – Tuesday 26th May

YB Currency Update – Tuesday 26th May

We come back to our desk after a surprisingly sunny bank holiday weekend to find the world a little less safe, especially for the Japanese who are in range of the short range missiles tested by North Korea, who have also been testing nuclear weapons underground. The political uncertainty in the region has hurt the Yen, as North Korea now seems to be a genuine rogue state that not even their only ally, China, can control. The Pound has stayed steady against the Yen holding around Y150, even as it has fallen back against the Dollar.

The Pound was hit hard last week with the S&P's downgrading of the outlook for UK credit rating, however the setback seems short-lived and seems to have had a longer term effect on the Dollar as the reasons given for the downgrading, the prospect that the UK debt will grow to 100% of GDP, are also true for the US. The Dollar has also been under pressure due to renewed rumours that some nations foreign reserves might starts to diversify away from the Dollar. This is something that has been talked about for a long time, the last worry was over whether the middle eastern nations would remove their Dollar peg, but this time there is no doubt that China does want to diversify away from the USD, however this will not be easy, as the market for US Dollar investment products is the only one big enough to service China's currency reserves. Even with the downward pressure on the Dollar the Pound failed to break above 1.5950 over the bank holiday and has even dropped back below 1.58 in this morning's trading.

Sterling may have had a volatile period against the USD, but it has stayed remarkably steady against the Euro hovering between 1.13 and 1.14, and some bank holiday news out of Europe (it wasn't a bank holiday across the channel), showed an improvement in the May Ifo survey, although not enough to make any dent on the 3.8% contraction in German GDP, and helped the Pound climb up towards the top of the range just under 1.14.  
City traders have a gentle introduction into this shorter week with no UK data out, there is Industrial orders from the Eurozone, and a couple of regional manufacturing survey's out in the US, but the general tone of the currency markets today is likely to be led the stock markets and this seems to be keeping the Pound steady against the Euro, and to be taking it down slightly against the USD as markets open slightly weaker.

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