13 July 2010 By MoneyHighStreet Staff
The Pound weakened against the US Dollar before bouncing back strongly through the day of trading.
The Pound initially dropped under the $1.5000 support level.
Investors were increasingly concerned over the fragile economic recovery and questioning whether the government has sacrificed economic stability to reduce the shortfall in the budget?
Whilst George Osborne’s emergency budget drew worldwide acclaim with the most dramatic public spending cuts seen since Margaret Thatcher’s government in the 1980s and the Pound subsequently gained against the US Dollar, the past week has seen economic data released which has increased the prospect of a “double-dip” recession.
The Office of National Statistics reported that Britain’s current account deficit was £9.6 billion in the first three months of the year and another report showed that the UK economy only grew 0.3% in the final estimate for the first quarter.
Alan Clarke, an economist at BNP Paribas SA, said that “the second quarter figure should be very robust. That quarter will be the peak. The fiscal tightening will start impacting in the fourth quarter, but that’s really a story for next year.”
Sterling is vulnerable to further downward moves, especially if the data today reveals that inflationary pressures subsided in June, all but diminishing the prospect of a near-term increase in interest rates.
UK stocks saw shares in BP Plc rally following speculation that Apache Corp may buy about $12 billion worth of the oil producer’s assets, as BP looks to reserves to pay for the massive Gulf of Mexico oil.
This speculation added to the speculation that the company may successed in halting the oil spill and at the close of trading last night BP Plc had rallied by the most in 19 months.
European stocks also advanced.
Off the back of these positive stock moves, in foreign exchange trading the Pound rallied against the Euro and the US Dollar.
Neil Jones, head of European hedge fund sales at Mizuho Corporate Bank Ltd, said that “there’s a slight return to the pro-risk trade. If this risk continues through the earnings season, I would imagine the Pound does quite well. Speculation about a bid for BP, the third largest stock by market value in the British Benchmark Index, may also boost the currency.”
Standard & Poor’s affirmed the UK’s AAA credit rating. However, S&P analysts Trevor Cullinan and David Beers said in a report yesterday that “the coalition government has set out what we view as a strong framework for fiscal consolidation. There is still a material risk that the UK’s net general government debt burden may approach a level incompatible with the AAA rating.”
The Pound rose 0.6% against the Euro yesterday, the most since June 29th, but the UK currency may struggle to consolidate on the gains, amid a host of economic data. The RICS house price balance disappointed investors last night, offsetting a largely positive retail sales report from the British Confederation of Industry.
EUR/USD
The Euro fell against the U.S Dollar yesterday, falling to lows near $1.2550 in early trading, before some recovery last night. Euro-zone structural concerns continued in focus throughout the day, as uncertainty over the bank stress tests on Thursday persisted.
There is concern that around 15% of banks could be deemed to have failed tests and this will have a very negative impact on the Euro. European finance ministers are under pressure to disclose more about the stress tests being conducted on banks to see whether they could withstand losses if the region’s sovereign debt crisis worsens.
Market Analysis by Adam Solomon, TorFX
From MoneyHighStreet.Com published on 13 July 2010