The currency blog

Yesterday sterling started on a fairly positive note after UK CPI data came in stronger than expected- this should have suggested that falling inflation was maybe not as bad as expected and that the QE measures so far introduced have started to have some effect. However later in the morning Mervyn king addressing the parliamentary committee soon gave the markets an insight into the thought of the Bank Of England and unfortunately for sterling it is still very negative. The hammer blow for the pound was the consideration that the deposit rate for reserves will be lowered- although this is not cutting the official rate it is still akin to a dovish outlook- this also leaves the door open for further QE measures. The frustration from the Bank of England is that the banks are not yet passing on the liquidity in the form of lending- the cogs are still not turning as they should be to drive the UK economy forward. Today we have seen official unemployment for the UK rising to 7.9% (the highest in 14 years) with claims for benefit growing by 24,400. Although the employment data has come in line with expectations taken with the negative comments from King the pound is on the back foot and is likely to remain so for the short term.

Yesterday from the US we saw retail sales come in well above expectations at 2.7%- in addition Ben Bernanke was quoted as saying that the recession may have technically ended. This good cheer added further woes to the USD which lost further ground against most currencies except sterling. The big movements to look at are EUR/USD posting six daily highs and hitting 1.47 and also USD/JPY is now testing the 90 level. The Euro is looking more and more attractive as a possible alternative as a reserve currency to the USD and yesterday ECB member Stark talked about the risks of keeping interest rates low for a prolonged period- this was perceived as hawkish by the markets and bolstered the euro. GBP/EUR suffered a double negative due to Kings and Stark’s comments leaving GBP/EUR down towards 1.12 and looking tentative.

Look for more volatility today as the markets re-adjust to weaker USD levels and the ailing pound.

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