Indecision is Final
An update from the currency exchange firm World First
The schizophrenic nature of markets was again illustrated by sterling’s contrasting performance from the beginning to end of the week. The hangover from last Friday’s shock negative GDP sent the pound into a nosedive against both euro and dollar. This was in spite of talk that the dollar was under the cosh. The Euro, as ever, maintained its position as the pick of the trio and even touched 1.5050 against the dollar. Its position was helped by comments from Chinese officials indicating diversification away from the dollar across to the euro as the global reserve currency.
The USD benefited early on in the week when a downgrade of several US banks saw risk back on and furthermore, served as a reminder of just how volatile the currents that run beneath FX markets still are. USD data has generally surprised to the downside during the crisis. As with US GDP and several other key indicators this trend seems to be reversing. This causes any more negative releases to invoke the same risk aversion trading that we experienced during the beginning of the meltdown after Lehman’s failure. The more positive USD surprises will encourage risk and assuage concerns regarding the recovery. Consequently, we can expect a weaker USD long term.
GBP movement north against the EUR was due to the concerns regarding European competition rules on the subject of banking regulation, a similar weakening of European banking stock on the equity markets was also observed. The pound kept pace with the greenback as the end of the week saw US data increase risk appetite.
The following week sees the busiest calendar in the FX markets for some time and subsequently a plethora of event risk. We have the FOMC meeting on Wednesday, expecting they maintain their rhetoric regarding the need for economic conditions"‘to warrant exceptionally low levels of federal funds rate for an extended period.” This will be positive for risk and USD negative.
We then follow the next day with both BoE and ECB meetings. We can expect the ECB to hold rates steady but with Norway the first euro zone country to raise interest rates we cannot expect the single currency to be light years away from it and given the ‘hawkish’ nature of Trichet et al. hints may be given in the post-decision press conference.
Having seen the US approach to the crisis bearing fruits it highlights the market difference in approach. The most important sentiments we hope to hear from the BoE are that of decisive and precise action; a categorical statement that either QE is finished or an exact final amount that will be allocated would bode well for the pound in the future. With inflation figures in the UK still very low, GDP still negative, a country in recession and the previous form of the 9 voting members it seems odds on, around 70/30, for more stimulus. However, it is impossible to predict the future so we shall just have to wait and see.
The week is not finished though; we round off with US non-farm payrolls. As you can see the event risks are monumental so strap on your seat belts because this week is about as exciting as FX markets get.
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