MARKET COMMENTARY: STERLING THE STAR PERFORMER TODAY!

Features » Finance and Money

Contributor / 2009-08-21 12:25:12

Sterling was the belle of the ball in the currency markets yesterday gaining 1% against the USD and the EUR.

The positive trend was started with the news that Consumer Pricing Index data for the UK (a key indicator on inflation) came in unchanged at +1.8%. Although the inflation level is still below the 2% target a drop was widely forecast. This was especially true against the Bank of England raising the Quantative Easing (QE) programme by £50 billion and the feedback from the quarterly inflation report which noted that inflation was set to fall below 1%. Sterling jumped on the news as the market digested a less dovish underlying data snap than the sentiment preceding.

Later the International Monetary Fund added to the good cheer by noting that the global recession was ending- however they also warned of higher taxes for most economies due to the increased fiscal burden- the UK probably at the forefront of that statement. Alastair Darling indicated that growth will return by the end of 2009- however will this be sustainable or stimulus related and fickle? The markets digested further positives in the German ZEW survey on sentiment which posted its highest level for 3 years and on the back of all the positives- equities rallied, oil rallied and sterling rallied- the USD weakened.

One trend in the last couple of days to keep an eye on is the divergence between GBP/USD and EUR/USD. We have seen gains in GBP/USD not reflected in EUR/USD and this in turn has allowed sterling to creep up against the euro. This could reflect more negative sentiment on the euro and a break below 1.40 on EUR/USD could catalyse a move to 1.20 on GBP/EUR.

Today we saw the Bank of England minutes affirm a vote of 6-3 split on raising QE by £50 billion. The market initially incorrectly anticipated that the 3 voters wanted less than £50 billion or no expansion and the pound spiked….then it became clear that the 3 voters wanted more QE than the £50 billion- hence the pound got sold…the pound is also softer on a 5% drop overnight on the Shanghai index.

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