FED PLAN HAZY - GBP/USD STILL GLIMMERS

FED PLAN HAZY - GBP/USD STILL GLIMMERS

The upshot of yesterday’s main event, a fresh and seemingly vigorous new plan by the Federal Reserve to purge the US banking system of its dirty assets, was pretty stale. The scheme, which involves flushing out around 1 trillion Dollars worth of questionable, mainly mortgage-based, instruments by using Government loans to encourage uptake, is theoretically powerful, but sadly lacked the practical technicalities to spur investors into the monster equity rally which we half-expected. Despite being formally vaunted by US Treasury Secretary Timothy Geitner the whole operation simply has not captivated investors enough on the short-term to extend last week’s rally against the Dollar and into equities and riskier market assets. It is simply too vague at the moment and will have to be much more fleshy before it gives the markets enough strength to jettison more Dollar holdings and US Treasuries in favour of the belief in an impending bottoming out of negative growth and the return of cheap equities.

The result of the above then was a very lacklustre day on currency markets. The wild-eyed fervour of last week which saw bumper sell orders on the Dollar was trumped by ghostly silence as traders bemusedly decided to pare bets instead of overextend themselves in a market that has come a long way in a very short time. As EUR/USD fell back to 1.35 from 1.37, it wasn’t necessarily that Dollar-based risk aversion had taken hold again, but more that speculative positions had been pared, for now. GBP/USD, as we would have expected, also pulled back from 1.46 to 1.44, driven by the proxy effect of the Dollar in its own right.

GBP/EUR, currently suffering terribly under the weight of the newly popular single currency moved down to the 1.06 mark as a poor show by the FTSE added to the Pound’s struggle. As we continue to comment though, GBP/EUR will only conceivably experience a hearty renaissance when the ECB, at the very least, shows itself to be intending on joining the global Central Bank money-printing brigade. Currently the single currency is too well insulated in terms of its corresponding monetary policy to be scared by the Pound even if global financials bounce.

Today will likely see another push on GBP/USD as investors tentatively adopt stock market positions and look at emerging market equities further to yesterday’s events. GBP/EUR should also gather some small momentum as a barrage of Eurozone manufacturing data this morning brings the Continental region back into the limelight. Expect a top of 1.4750 on GBP/USD and 1.0850 on GBP/EUR for the morning ahead of some extremely important UK-events including CPI and Inflation Report hearings. Further to these, which may highlight the growth of inflation at a faster pace than expected, Sterling markets may be tentative for the rest of the day.

Raphaels Bank CFX Team
0800 587 8722
cfx@raphael.co.uk
www.raphaelsbank.com/cfx

This newsletter is the personal view of Raphaels Bank and nothing herein should be construed as a recommendation or advice. The Bank accepts no responsibility for the correctness or otherwise of any matters contained herein.

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