The currency blog

Has sterling broken the back of recent USD and euro strength witnessed in the last 6 months? You cannot take this for granted as sterling remains a fragile entity- we witnessed this in last weeks sharp sell off in sterling amid the political furor. The fact that the pound has recovered strongly is testament to increasing optimism for a recovery in the UK economy and also recovery in the global markets. Cable (GBP/USD) has moved back over 1.65, sterling has consolidated at 2009 highs against the euro and we are still above 160 against the Yen. Sterling has had a range of positive economic indicators of late and most recently a survey by Gfk/NOP, a leading market research agency showed that inflation expectations for the coming year rose to 2.4% in May from 2.1% in Feb. Also we had further good news in the housing sector as the Council of Mortgage Lenders reported that mortgage approvals rose 16% month on month in April and loans to first time buyers improved by 11%. Sterling was also supported with confirmation of the Barclays/Blackrock deal completing- helping sterling through expected M&A flows materializing.

On the flipside we have seen sterling fall off a cliff on a number of occasions. Alistair Darling featured in a story in the FT called for caution on recent signs of an economic recovery in the UK. He signaled the threat of inflationary pressure from rising oil prices could hamper a recovery. Oil prices have risen swiftly to over $70 as optimism improves. BoE member Paul Fisher backed up the call for caution stating that policymakers should not be complacent and warns that there is a major downside risk to growth still evident. In my view sterling is not out of the woods yet and may still trip on a few branches but the worst is behind us.

The US dollar looks like a currency in no mans land…yesterday data pointed to a sharp drop in jobless claims and an improvement in retail sales- yet the dollar was sold. The dollars problem is that risk appetite is fuelling dollar selling and concerns over the US fiscal deficit are not supporting the dollar on good news. The euro is also looking a little jittery on concerns of banking issues yet to emerge- this concern was underlined by comments from Deutsche that German, Irish and Nordic banks still look weak. Eurozone industrial production just release came in worse than expected at -1.9% month on month. EUR/USD has moved off this mornings high at 1.41 and is looking at the moment to test the 1.40 level on the downside. Sterling looks consolidated at 1.17 against the euro.

No real data of note today- G8 are meeting in Lecce but no immediate impact is expected to fall into the markets.

Discuss on this on the Currency Exchange Forum