The currency blog

Sterling was the belle of the ball in the currency markets yesterday gaining 1% against the USD and the EUR. The positive trend was started wit the news that CPI data for the UK (a key indicator on inflation) came in unchanged at +1.8%. Although the inflation level is still below the 2% target a drop was widely forecast. This was especially true against the BoE raising the QE programme by £50 billion and the feedback from the quarterly inflation report which noted that inflation was set to fall below 1%. Sterling jumped on the news as the market digested a less dovish underlying data snap than the sentiment preceeding.

Later the IMF added to the good cheer by noting that the global recession was ending- however they also warned of higher taxes for most economies due to the increased fiscal burden- the UK probably at the forefront of that statement. Alastair Darling indicated that growth will return by the end of 2009- however will this be sustainable or stimulus related and fickle? The markets digested further positives in the German ZEW survey on sentiment which posted its highest level for 3 years and on the back of all the positives- equities rallied, oil rallied and sterling rallied- the USD weakened.

One trend in the last couple of days to keep an eye on is the divergence between GBP/USD and EUR/USD. We have seen gains in GBP/USD not reflected in EUR/USD and this in turn has allowed sterling to creep up against the euro. This could reflect more negative sentiment on the euro and a break below 1.40 on EUR/USD could catalyse a move to 1.20 on GBP/EUR.

Today we saw the Bank of England minutes affirm a vote of 6-3 split on raising QE by £50 billion. The market initially incorrectly anticipated that the 3 voters wanted less than £50 billion or no expansion and the pound spiked….then it became clear that the 3 voters wanted more QE than the £50 billion- hence the pound got sold…the pound is also softer on a 5% drop overnight on the Shanghai index.

Discuss on this on the Currency Exchange Forum