POUND WELL HUNGOVER FROM WEEKEND OF BANKS BINGEING ON GOV MONEY.

POUND WELL HUNGOVER FROM WEEKEND OF BANKS BINGEING ON GOV MONEY

Foreign exchange markets last week continued to be structured by high Dollar demand as fear over the inefficacy of Central Bank measures to calm the global economy, combined with terrible data on the state of real economies, continued to boost the currency. Despite a small but sharp sell-off on Friday after US Non-Farms, showing a monthly decline of 650,000 jobs in the US, the currency still found favour thanks to its position as the world’s main source of capital funding and its current status as an asset haven which is running in a now largely divorced relationship from the actual performance of the American economy.

Dollar pressure contributed hugely to a considerable decline in GBP/USD over the week, which retreated heavily from a push to the 1.44-1.45 area at the beginning of the week to hold at the psychologically important 1.40 mark at its end. However, as very poor performance over the week from GBP/EUR showed, Sterling put in an extremely poor show in its own right. Despite the European Central Bank being very dovish in a forecast for its interest rate curve on Thursday, the market’s main concern was focused on the health of the UK economy in light of the Bank of England commencing its first ever quantitative easing programme this month. To put it simply, Sterling investors are concerned over two dangers that accompany measures to try and enhance UK money supply. The one is that the measures, which are beginning at the creation of around 100 billion Pounds of gilts, will be very difficult to control in the long-term, possibly leading to unbridled inflation. The second is simply that the measures will have no effect and are actually indicative of an economy sliding into the abyss.

However, despite the above, GBP/EUR has still managed to hold itself above the 1.11 mark for open this week. This reflects, first and foremost, the appalling outlook on an extremely weak Eurozone and a highly questionable recent history of European Central Bank Policy. Secondly though, there is certainly an argument out there at the moment that, given the dilapidated nature of the global outlook, the Bank of England may simply be ahead in a game of last resorts to stoke a failing economy. If this proves to be the case and conditions do continue to deteriorate, then, while Sterling may not rebound on the short-term, it certainly has girding for the medium-term.

Following a further increase in the UK Government’s stake in Lloyds Banking Group over the weekend, Sterling will probably take a short-term pasting this morning. Though the currency will probably recover later in the week, the lack of any major economic data today to turn investors attention elsewhere, a focus on the UK Governments fiscal strains and falling credit rating will probably push GBP/USD sub 1.40 again with GBP/EUR likely struggling to hold onto 1.10.

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.

Authorised and Regulated by the Financial Services Authority.