The currency blog

The Bank of England surprised the markets by keeping the Quantitative Easing programme at £125 billion, as expected interest rates were kept at 0.5%. This was a big shock to the markets which had sold sterling in the run up to the announcement with the expectation that a further £25 billion would be injected. For sterling we saw a knee jerk reaction to the news- moving higher against the USD and the euro. This puts sterling back into its comfort zone against the USD and euro and we should hold the 1.15-1.185 and 1.62-1.66 range in the short term. The move in sterling was not wholly significant due to the door being left open for a review on QE in the August BoE meeting; in addition recent weak economic data for the UK in the form of Industrial output and GDP is still weighing on the pound.

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July and August are strange months in Spain, for a start if you want to get things done, contact people or progress business issues it seems doubly difficult than it is the rest of the year, and as we all know doing business in Spain is not always easy the rest of the year either! But in July and August it seems the Mañana syndrome slows down even more, much like a 45rpm record being played at 33rpm (for those that can remember vinyl)!

Then there is the extreme heat and increased humidity that makes many of us want to stay in our air conditioned environments, be they home, car or office, and I have spoken to many people recently who are feeling tired and jaded and in need of a holiday. Perhaps it’s watching all those tourists enjoying themselves!

Many ex-pat business people here in Spain seem to be finding business quite a struggle at the moment, even those that have been successful in the UK. So why is this the case? Read the rest of this entry »

Yesterday sterling remained under pressure for the trading day as the prospect of increasing the QE programme was priced into sterling. As is common on interest rate decisions, the speculation beforehand will move the value of the currency before the actual announcement. Sterling clung to its current trading range against the USD and the Euro but only just; in afternoon trading we briefly saw a test of the 1.60 level against the USD before sterling managed to fight its way back to 1.61; against the euro it dipped to 1.1550 but did not threaten the 1.15 level. This morning sterling has hopped up against the USD so a good start to the day for sterling but it is not out of the woods yet. Later today the BoE are set to confirm the increase in QE but it will be the accompanying statement that will be key; the risk for sterling is if the door is left open for further expansion of the QE programme going forward- we will find out this afternoon!

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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.

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Very quiet in the FX markets yesterday and the USD and the YEN continued to remain firm across the market. The lack of movement in the markets and the support of the USD and YEN can be attributed to a weak assessment by the European policy makers. ECB president Trichet was very prudent during the latest Financial Stability Review and his tone had a whiff of fear on a further credit crunch within the banking sector. This concern has been heightened through an article in the Telegraph highlighting dire conditions in the Balkan states- in particular Latvia and Bulgaria. Both nations had their currency pegged to the euro with very negative results as GDP is dropping sharply, unemployment increasing and fiscal deficits rising- the concern is that this could spill over to lending nations such as Greece, Hungary and Italy. The Balkan headache is still thumping and going forward could realize significant downward pressure on the euro. No direct effect on the markets as yet but definitely an area to watch.

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With Friday being a US holiday it was expected that we would see some volatility within the trading ranges; in UK trading we did not see a jot as the markets remained relatively quiet ahead of the weekend. The situation changed in Asian trading as risk aversion was ratcheted up a couple of notches due to a few contributing factors; firstly the hangover of the payroll data on Thursday was still apparent and undermined any move into risky assets. In addition the civil unrest in China did not help- here violence in the western region of Xinjiang has left at least 140 people dead and more than 800 people injured helping the case for risk aversion. We also have jitters ahead of the Obama-Medvedev meeting in Moscow on the reduction of nuclear warheads.
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