The currency blog

The recent Sterling and Euro rallies finally ran out of steam at the weekend. The Euro hit a two month high against the Dollar before running into large selling resistance and falling back towards 1.25. This week sees US firms reporting their quarter two numbers, the usual window dressing and massaging of numbers will likely induce a fair amount of volatility in the stock and currency markets but the market believes an overall positive theme should emerge and this is producing the current Dollar strength. Although German manufacturers posted some impressive sales figures at the end of last week and boosted confidence in the continuing Eurozone economic recovery, fears over manufacturing and unemployment data in periphery member nations is swamping any and all positive news from Germany. Added to the muted response to the Stress test methodology there is enough news around the keep the Euro suppressed for the next few days.

Sterling fell below the key 1.50 level over the weekend as fears over the UK economic recovery remerged. The IMF’s warning that spending cuts and tax increases announced by the coalition Government will reduce future growth levels has pushed the pound lower against the Dollar and Euro, but the key driver of the Sterling sell off seems to be technical. Failure to break through the 1.5260 level signalled to traders to realise profits, sending the Pound lower. We will get a clearer picture of the current economic climate in the UK this week, with the release of the delayed GDP figures and inflation and unemployment data. Market sentiment suggests Sterling may be more vulnerable than other currencies if we see deterioration in performance from the UK economy.

The Yen came under the spotlight with the dismal showing from the ruling party in Japan at yesterday’s elections. The results showing that the Democratic Party took only 44 seats in the Upper House, down from 54, and lost control of the House have left the recently appointed PM, Kan’s position seemingly untenable and puts into doubt the whole package of reform designed to pull Japan’s struggling economy round. The Yen weakened sharply, even against the Euro, but it was the Dollar that benefited most. The fact is that for the moment, Kan will limp on in power and that the Yen should not weaken too much (with differentials in interest rates too close to trigger big shifts in funds and the Chinese seemingly intent on increasing their Foreign Reserves holding of Yen) but is the damage to risk appetite that might be the key to the next set of moves in the forex markets.

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