NEWS/BLOG

Divergent Data Leave Pound Stalled

An update from the currency exchange firm World First

The US Independence Holiday and the subsequent long weekend started last week in a sleepy mood with markets ending the week rather sedately.  Anticipation of the G8 summit and a discussion on real USD alternatives as the Global Reserve currency were seen as the major drivers of FX markets however turmoil in China called the Premier home to deal with more pressing matters and with the loss of such a key figure caused the G8 summit to become very much a side show.  The main event proved to be the BoE rate decision.

Sterling PMI came out rather positively above 50.00 but it was not as positive as some had expected, yet all were still hopeful.  The correlation between Greenback strength and oil prices began to ring true again as we began to see less incentive driven trading and a return to fundamental economic relationships as the major factor in pricing the dollar.  It is probably the first week since Lehman failed that we have seen a return of these fundamental economic relationships driving the price of currencies.

Oil prices dropped to a 8 week low and signaled to investors that the worst of the downtown is yet to be over and provided some much needed perspective.  As a result, risky assets were dropped like a bad habit.  Sterling, viewed as riskier than a big bag of risky things, suffered.  However, poor housing data from Europe provided GBP with something to cling onto to until rumors that the BoE were about expand the quantitative easing scheme spooked markets.

Stock markets continued to move lower as US corporate earnings numbers failed to impress.  Risk returned to the markets with vengeance and coupled with the perceived event risk surrounding the BoE meeting the pound continued to fall.

The BoE’s MPC announced that they were keeping interest rates at 0.5% and that they were not going to expand the QE policy to utilize the £25Bn left in the tank.  Sterling briefly rallied but with the expectation that they will utilise the £25bn already earmarked, or worse sanction more debt, in August we were due a bumpy ride whilst markets seek to price in this possibility.  The week was rounded off with mixed news of a 48% rise in Chinese car sales but a fall in US Consumer Confidence.

We anticipate the week ahead to hold a large downside risk to sterling.  The week begins quietly but Tuesday sees very UK-centric house data out, with both RICS and DCLG out.  We also have core RPI and CPI from the UK.

Wednesday will certainly be a busy one with UK unemployment figures and Average earnings out prior to details of the FOMC Minutes. On Thursday the US will release a raft of data including NAHB housing, Initial Jobless Claims and Philly Fed Manufacturing PMI. We round off the week with US housing Balance.

Trade of the Week

This week’s trade of the week is a simple Vanilla Protection option for a seller of EUR and a buyer of Sterling

This option gave the client a worst case rate (WCR) of 1.16 and the ability to participate in 100% of favourable movement upwards of the WCR for an upfront premium of 2.2%

If, on expiry, GBP/EUR is above 1.16 the client can buy at 1.16. If, on expiry, GBP/USD is below 1.16, the client is able to participate in 100% of the movement upwards. For full details of this structure, please contact one of the WorldFirst options traders on 0207 801 9050.

For more information see www.worldfirst.com.

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