YB FX Daily Report – 18th May 2009

YB FX Daily Report – 18th May 2009

The Pound has started this week on the front foot as German and Eurozone GDP figures at the end of last week, and the Rightmove house price survey released overnight, have sent the GBP/EUR rate up to near 1.13. Almost as inevitable as Man U eking out the necessary point from their last two games, was the greater than expected drop in German GDP, falling 3.8%, while Eurozone GDP fell 1.6%, although with many business running down their inventories, there could be a sharp recovery when the warehouses need to be filled. German GDP is performing worse than either the UK or the US, and the ECB are still perceived to be behind the curve, in terms of rate cutting and QE measures. With the Fed and the BoE doing much more to stimulate growth, the recovery is likely to start earlier in both these economies leaving the Euro lagging behind, and the GBP/EUR rate likely to be heading up towards 1.20 by the start of the 4th quarter.

The house price survey showed prices rising by 2.4% over the last month, taking the annual rate to just a 6.3% fall. Mortgages are still hard to get, and the number of houses changing hands is still near record lows, however the upswing in house prices is still positive (except for those of us yet to get on the housing ladder), even though the survey only measures asking prices, and Sterling has responded climbing not just against the Euro but also pushing up past 1.52 against the Dollar. The Pound's climb against the Dollar has been muted by falling equity markets which have dampened risk appetite and kept the Dollar supported.

There is no more data out today, although the rest of the week sees some important releases, UK CPI and German ZEW index tomorrow, with inflation likely to moderate, while the German ZEW index is likely to reflect the poor GDP figures from last week. On Wednesday we get minutes from both the Fed and the BoE, Thursday is UK retail sales, and we end the week with a revised figure for UK GDP, which is likely to be improved with industrial production proving stronger than expected when the figures were initially released. The week ahead could be a strong one for the Pound with the data likely to paint a picture of a bottoming out of the recession, and should lead us into what I have no doubt be a sunny bank holiday weekend.

Michael Corcoran | Treasury Solutions Partner | Wholesale Banking | NAB

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