Market News June

02/06/2010

Mixed fortunes for sterling over the last couple of months with continued gains against the euro being offset by a slump against the US dollar. Last month saw general dollar strength push the pound lower by over 7 cents (4.8%) on the month while pressure on the euro allowed the pound to gain nearly 3 ½ cents (2.9%) in May.

The Bank of England held interest rates at 0.5%, as has been the case since March last year, and also made no changes to the asset purchase program.

The pound has been largely driven by three factors over the last few weeks, namely the UK General Election, continued (and increasing) turmoil in Europe and a market dominated by risk appetite (or more accurately, risk aversion).

The General Election delivered a well documented hung parliament which was initially poorly received.  Early debt reduction measures have helped smooth the waters somewhat although attention will shortly focus on the upcoming (June 22nd) emergency budget.
 
European woes have continued with a €750bn rescue package announced to tackle sovereign debt problems. Initially well received, the problems in Greece in particular and also Portugal and Spain will not go away and the euro remains under severe pressure. As such, investors are exceptionally risk averse with the US dollar benefiting as a traditional safe haven.

Data wise, positive results were noted in manufacturing PMI, the labour market, industrial and manufacturing production, retail sales and business investment. Q1 GDP was also upwardly revised to 0.3% from the initial 0.2% reading.
 
On the flip side, the trade deficit widened with a surge in imports and weak exports to blame, services PMI slipped, although it remains well in expansion territory, and CPI inflation rose to a 17-month high. Meanwhile, RPI surged to its highest level in 19 years.
 
As we go to print, the pound has just hit an 18-month high as it printed 1.20 against the euro for the first time since December 2008. This level merely provides psychological resistance and provided the pound can stabilise above last year’s 1.1905 high, a push towards 1.2150/1.2205 is on the cards. Beyond here, 1.2350 and even the 1.2630/1.2750 area would be realistic targets for bulls. Support on a break back below 1.1905 provided by 1.1860, 1.1775, 1.1625 and 1.1515

GBP -USD

GBP-EUR

Interest rates                  0.50%                             
Unemployment Rate      8.0%                               
CPI Inflation                     3.7% y/y to Apr ‘10       
GDP                                   0.3% q/q to Mar '10     

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