Pound Suffers from Political Jitters
The following update is from the trusted currency exchange firm World First.
Former Prime Minister Harold Wilson once stated that “A week is a long time in politics.” While it was no doubt a long week for the Labor party as they struggled to retain their tenuous grip on power, sterling’s energy was also drained as the effects of ongoing political uncertainty took its toll.
The pound finished the week down, and far off the highs of 2009 it reached earlier in the week against both the single currency and greenback. After managing to post highs of 1.6660 against the dollar, and 1.1665 against the euro it closed the week on the back foot. The catalyst for the decline in risk appetite, which has been rampant in recent weeks, was a rumor that Gordon Brown was to resign. While this was immediately denied by the government, sterling was sold off heavily on the back of this and speculation about the European elections results.
The week began with positive consumer confidence figures from the UK, met with a measure of surprise. While confidence has been high recently, this can be attributed to the recent equity market performances rather than underlying fundamentals, and as confidence figures tend to lag about 6 months behind the employment levels, we expect these figures to ease in the coming months. But sterling was in a bullish mood, and manufacturing data from both Britain and China added impetus to the rally. Further support in the form of Construction PMI from the UK arriving at 48.5. Although still indicating a contracting sector, when viewed in the context of the previous month s figure of 33.7 it is not hard to see why markets lapped it up.
With conventional economic policy well and truly exhausted, the meeting of both the BoE and ECB turned out to be a non event, with both bodies leaving rates unchanged at 0.5% and 1.0% respectively. This was in line with our predictions and general market expectations, and so passed rather insipidly.
The dollar recover strongly on the back of a Non Farms result released at 345K vs 520K expected, the smallest figure recorded since September 08. This fueled speculation that US economy is recovering well, and stemmed the recent flow out of dollar positions. Latvia hit the headlines throughout the week, as a government debt auction failed to raise any bids. This caused a sell-off for the Swedish Krona, as their banking sector has a high exposure to the mess within the Baltic States.
The week ahead is rather quiet one, but look out for Tuesdays RICS House Prices and BRC retails sales which will drive UK assets. Wednesday heralds US trade balance and UK Industrial and Manufacturing Production figures. Thursday reveals the BoE Inflation Attitudes Survey coupled with the ECB Monthly report, and US Retails Sales Data and we round off the week with US Michigan Consumer Confidence.
We will also keep a close eye on the political situation in the UK this week, as this is bound to be a major driving force behind equity movements and sterling. Whatever the future holds on the UK political horizon, we can only hope that it isn’t a repeat of Harold Wilson’s first term in office, largely spent fighting the inevitable devaluation of the pound.
Trade of the Week
The trade of the week is relevant to a seller of sterling and a buyer of euros. This zero premium structure enabled the client to hedge their exposure for a six month period through a ‘window convertible forward.”
The client has a worst case rate (WCR) of 1.13 and can benefit 100% of any and all upside up to a rate of 1.25 during the relevant window period. Should GBP/EUR hit 1.25 at any point in the window period, the structure reverts to a forward contract at 1.13. For full details of this structure please contact one of our options traders on 0207 801 9050.
If you would like to discuss your foreign exchange requirements, please contact the World First Corporate Foreign Exchange Team on 020 7801 9050 or our Private Client Currency Exchange Team on 020 7801 9080.
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