Weekly Currency Report (30-10-2009)

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This week

After the pound slumped on Friday due to the release of weaker than expected UK GDP data traders began to scale back their sterling short positions at the start of the week. The general consensus in the market seemed to suggest that despite the weaker data the drop in growth had slowed and that the pound sell off was overdone. The pound's recovery on Monday developed into a slow upward trend as the week continued, led mainly by weakness in the euro and the dollar, but local economic data further supported the currency.

UK CBI distributive trade data came out better than the previous release at eight while mortgage approvals came out at 56,200, up from the prior 53,000 and far better than market forecasts of 53,600. The data all pointed towards a more stable economic recovery position than had been suggested by Friday's GDP figures or the general market perception that the UK was lagging significantly behind the euro and the US in terms of where it was on the economic recovery path.
 
The dollar started the week firmly on the back foot as rumours hit the markets regarding China's foreign reserves. China was reported to be diversifying its reserves away from the weakening dollar which weighed on the dollar since China is the biggest foreign holder of US dollars and a sell off would weaken the currency. Losses were limited as it soon became apparent the rumours were unsubstantiated.

Gains in the dollar soon accelerated as commodity prices took centre stage. Oil prices have recently been appreciating gradually to trade above $80 per barrel, led by an appreciation in gold prices. Oil prices were primed for a bout of profit taking at these levels with a break in oil prices coming on Monday.

Prices dropped by about 4.5% dragging commodities lower across the board and boosting the dollar versus the pound and the euro. Equity markets had a mixed performance throughout which further supported the opinion that investors remained cautious.

The week delivered a strong argument for dollar strength but gains versus the pound were limited, the euro suffered the greatest degree of losses as the greenback rallied ahead of the US GDP figures. Consumer Confidence dipped in October to 47.7 from the prior release of 53.4 in September. Added to this New Home Sales dropped to 402,000, consensus forecast was for 420,000 and the prior release revised down to 417,000.

Durable goods orders came out in line with forecasts but despite being an improvement was not enough to stem the safe haven demand for the dollar. With GDP figures looming, concerns were that the positive growth expected for the third quarter may not materialise.

Investor confidence was restored after US GDP data beat analysts' expectations coming out at 3.5%, 2nd quarter growth stood at -0.7% and numbers were enough to significantly boost risk appetite amongst investors. The dollar reached its lowest level for the week against the pound, nearly reaching the levels seen prior to the UK GDP figures. Personal Consumption data also came out better adding fuel to the fire and keeping the dollar pinned down at its lower levels.
 
The euro suffered across the exchanges as a broad-based sell off weighed heavily on the single currency. Data from the eurozone did not have an overriding weak tone, German import prices weakened to -0.9% from 1.3% the previous month and HICP data showed inflation pushing higher to 0.2% from -0.5%, which briefly strengthened the euro as the prospect of lower interest rates in the eurozone seemed less likely now.

Unemployment in Europe's largest economy dropped to 8.1% from 8.2% but the impact was muted as markets continued to buying into the dollar at the euro's expense. The pressure exerted on the euro by the dollar had a knock-on effect for the pound as it supported sterling's gradual appreciation against the single currency and gave it no room to recover despite data that would have generally given the euro plenty of opportunity to make gains.

Next week

Given the improvement optimism over the UK economy in general, this week will likely see some uncertainty set back in, the Bank of England, European Central Bank and the Federal Reserve Bank are all having their respective interest rate meetings but none are expected to make any changes to rates. What will be of interest will be their assessment on growth and inflation. Economies in Europe and the United States have all recently showed increases in growth while the UK still lingers in recession so any adjustments to forecasts will be taken note of.

In addition to the rate decision the US will release its Non-Farm Payrolls data, the employment figures had disappointed the previous month so markets will be hoping for a turnaround in this month's numbers to support the view of economic recovery and allow investors confidence and risk appetite to boost equity markets and weigh on the dollar to allow sterling to make some gains.