The currency blog

The riots in Urumqi have led to the Chinese President, Hu Jintao returning home and missing the G8 conference according to reports. For the FX markets this will greatly reduce the possibility of discussing a change in reserve currency from the USD and therefore we should not have any surprises for the FX markets. Gordon Brown backed up this consensus by saying there has been lots of speculation but no discussion on the USD being replaced as the global reserve currency. In the markets we have continued on the cautious theme, Asian stocks were driven lower by falling oil and commodity prices- this is adding further strength to the USD and the YEN as you would expect. Sterling is still on the ropes ahead of the Bank of England decision tomorrow; as you may have noticed recently the market sentiment can shift like the wind and this uncertainty is causing a lack of direction and volatility in the FX markets. Against the USD we are fast approaching the crucial 1.60 level and we are down towards 150 against the YEN, in addition we have fallen to 1.1560 on the euro.

The markets and Wall Street have also been spooked as talk of a second government stimulus plan in the US is spiraling. This has heightened fears that the economy is not yet on the path to recovery and that corporate earnings due this week will be weaker than expected. More stimulus basically equals uncertainty and a lack of confidence from the government that enough has not been done already- this naturally transpires to a lack of investor confidence. A similar feeling exists in the UK and this is exactly the reason why it is very likely that the Bank of England will increase the QE programme by £25 billion tomorrow to £150 billion.

Data out in the markets shows that French business sentiment came in as expected at 84; this is slightly higher than the 81 figure for May. The Bank of France also sees GDP for the second quarter at -0.4% against a previous forecast of -0.5%. Swiss June unemployment came in at 3.6%, worse than the forecast 3.4% and continues the theme of rising unemployment pretty much everywhere. Halifax house prices for the UK came in at -0.5% which was as forecast but less flattering than the market hoped for. Other data to come today will be Euro zone (European Monetary Union) GDP which is expected in at -2.5% which is the same as last month.

Look out for more intervention by the Swiss National Bank (SNB) as EUR/CHF is approaching the 1.50 level…can they continue this pattern of intervention and if they do not and the market falls below 1.50 where will it end up? - Definitely one to watch.

Discuss on this on the Currency Exchange Forum