31 July 2009

The Pound rallies against the majors, after UK house prices rise beyond initial estimates

GBPEUR/GBPUSD

The Pound rallied back against the Dollar yesterday, rising towards the resistance level at $1.6551 overnight, while the UK currency also made tentative gains versus the Euro, after a report showed that UK house prices climbed in July for a third straight month. According to the report from Nationwide Building Society, house prices increased for a third straight month in July, as a shortage of supply helped shield the property market from the worst recession in a generation.

The average cost of a home in Britain rose 1.3% to £158,871, after rising 1% in June, while economists had predicted a modest 0.2% increase. From a year earlier, prices fell 6.2%, the smallest annual drop since May 2008. The report adds to signs that the UK housing market may be starting to recover, as the economy emerges from the worst recession in at least three decades.

Investec Securities in London said yesterday that the Bank of England will decide next week to pause its bond-purchasing program at £125 billion, as inflationary pressures arise and spur speculation that policy makers may increase interest rates from the lowest level on record. Any such move to end the quantitative easing program would tend to propel the Pound towards the highest levels this year but should policy makers decide to extend the program to November, Sterling will come under significant selling pressure.

Philip Shaw, chief economist at Investec, said yesterday that "we are surprised by the scale of this increase" in house prices. "There appears to be more confidence in economic prospects and interest rates are close to zero. The Monetary Policy Committee will play wait-and-see." Shaw had previously expected policy makers to increase spending on the easing program to the maximum £150 billion authorised by the Chancellor Alistair Darling.

The Pound rose 0.7% against the Dollar following the housing data and rallied for a third straight day versus the Euro. House prices have now risen 2.6% in the three months through July, the most since February 2007, compared with 1% growth in the period through June. Martin Gahbauer, chief economist at Nationwide, said that "house prices have been remarkably resilient this year, despite a recessionary economic background with sharply rising unemployment."

Former Bank of England policy maker Stephen Nickell said yesterday that Britain needs to build 3% more homes than estimated last year because the recession has hit homebuilding. A report earlier this week showed that UK mortgage approvals rose to the highest level in 14-months in June, while house prices rose 1.3% in the first seven months of 2009.

The UK economy contracted 0.8% in the second quarter, after it shrank 2.4% in the previous three months. Central Bank policy maker Andrew Sentence said last week that there may be "some evidence of positive growth in the second half of the year, and the bank may shift to a "watching" stance on their plan to ease credit strains in the economy.

Daragh Maher, deputy head of global foreign exchange strategy at Calyon, said that "there is underlying demand for sterling, which means that when you get a good number, the market is pretty quick to come in and start buying afresh." The Pound is 0.2% highest against the Dollar in July, remaining on course for the fifth consecutive monthly gain. The UK currency has fallen 0.1% against the Euro, after rising for the previous three months.

Signs of a recovery in the UK economy have helped the Pound advance 13% against the Dollar year and 12% versus the Euro. The Office of National Statistics said on July 23rd that UK retail sales rose 1.2% last month, four times as much as economists had predicted.

The Pound was also supported by the underlying increase in risk appetite, as the UK FTSE 100 Index of stocks advanced for a second straight day, led by BT Group plc and Rolls-Royce Group Plc. Stocks rallied to the highest level since January and have recorded gains in thirteen out of the last 14-trading days, the longest stretch of gains since 2004.

BT soared 13% after the largest UK fixed-line company reported net income in the three months through June that beat initial forecasts and the benchmark FTSE 100 Index climbed 1.9%. The measure has surged 12% since July 10 after a host of U.S companies, including Goldman Sachs Group Inc, posted quarterly results that exceeded estimates. The U.S Federal Reserve Chairman Ben Bernanke also said that the economy is showing "tentative signs of stabilisation."

EUR/USD

The Dollar was unable to sustain any upward momentum against the Euro yesterday and was trapped in tight ranges as markets struggled for direction. There was a seasonally adjusted decline in German unemployment for July, although the underlying figures reported a small increase. There was also a further recovery in industrial and consumer confidence, according to the latest Euro-zone survey.

An index of business and consumer confidence in the Euro-zone rose to the highest level since November in June, adding to signs that the deepest recession in more than 60-years may be bottoming out. The growing confidence is just the latest evidence that Europe may have seen the worst of the recession, as indications of a global recovery improve prospects in the region.

The International Monetary Fund said yesterday that the Euro was overvalued by roughly 15% and has put some near-term downward pressure on the currency, although the impact was transitory. In the U.S, initial jobless claims increase to 584,000 in the latest week, from a revised 559,000 the previous week. The GDP data will be watched closely this afternoon and will have an important impact on risk appetite.

Today's Economic Data 31st July

EU 10:00 HICP Flash (July)

EU 10:00 Unemployment (June)

U.S 13:30 Gross Domestic Product (Q2)

- Deflator

U.S 13:30 Employment Cost Index (Q2)

U.S 14:45 Chicago PMI (July)

30 July 2009

The Pound rallies above 1.17 against the Euro as UK mortgage approvals increase to the highest level in 14-months

GBPEUR/GBPUSD

The Pound rallied well above 1.16 versus the Euro last night but the UK currency was unable to regain the $1.65 level against the U.S Dollar and dipped to lows around $1.6350 as the U.S currency secured wider support. Global equity markets were still relatively firm in Europe with banking shares rising and this provided some degree of appetite for Sterling.

UK stocks rose as Morgan Stanley advised buying Schroders Plc and mortgage approvals climbed to the highest level in 14-months in June, amid optimism that the worst of the recession has past. The benchmark FTSE 100 Index added 0.4% to 4,547.53 by the close of trading last night, resuming gains after the first drop in 12-days on Tuesday.

The measure has surged 10% higher since July 10th after a number of U.S companies, including Goldman Sachs Group Inc, reported second quarter results that exceeded estimates. The U.S Federal Reserve Chairman Ben Bernanke said that the U.S economy is showing "tentative signs of stabilisation."

UK mortgage approvals surged higher in June, adding to signs that the housing market is recovering as the recession eases and banks become more willing to increase lending. According to the report from the Bank of England, banks and lenders granted 47,584 loans in June, compared with 44,169 in May, ahead of preliminary estimates of 47,000.

Elsewhere, a report from real-estate agents Hometrack Ltd, showed that house prices held their value for a third straight month in July. Bank of England policy makers Andrew Sentence said last week that the bank may consider a pause in its £125 billion asset-insurance program if economic forecasts published next month point to a recovery.

George Buckley, an economist at Deutsche Bank AG in London, said that "we're expecting to see mortgage approvals rise as the banking crisis begins to ameliorate. The bank will be mildly encouraged by these figures. I don't see a change in bond purchases or in rates." Net lending secured on dwellings rose to £343 million, while gross mortgage lending was £1.98 billion in June, the highest level this year.

The average house price in Britain held steady at £155,600 this month and although the reading is still down an annual 7.7%, the slump in property prices appears to have abated. Sentence said last week that there may be "some evidence of positive growth in the second half of the year", and may shift to a watching stance next month on their plan to revive credit conditions through quantitative easing.

The Pound will remain susceptible to a likely sell-off in equity markets and Euro buyers would be well placed to take advantage of the current upside rally or at least place a stop order around 1.15-1.16 to protect against an adverse move in the market. The weakness in lending will also maintain underlying fears over the economy and will tend to unsettle sterling over the coming weeks.

EUR/USD

The Euro weakened steadily against the Dollar yesterday amid a series of unfavourable developments, as Chinese equity markets declined sharply over 5% and encouraged investors to seek the refuge of safe haven assets. Commodity prices also weakened, which was a negative influence, while Euro-zone economic data was weaker-than-expected with a provisional 0.1% drop in German consumer prices.

The IFO institute in Germany also reported that lending was more restrictive during July, which will maintain fears over a credit crunch in the economy. In the U.S the headline durable goods orders data was markedly weaker-than-expected with a 2.5% decline for June. However, order actually increased 1.1%, the most in four months, which signaled that manufacturing may expand in the second half of the year.

The Fed's Beige Book reported that the downturn was easing in most districts and was slightly more upbeat that the previous report. However, a separate gauge of the report indicated that weakness in the labour market and there was also a deterioration in the commercial property sector. Bank lending also declined in most categories, which will maintain concerns that any recovery will stall.

The focus today will fall on the EC sentiment indices with sentiment expected to show a further modest improvement, while remaining at relatively low levels, indicating a sluggish recovery. The Euro dipped to lows near $1.40 in U.S trading yesterday before a corrective recovery to the $1.4050 region and the Dollar will struggle to consolidate on recent gains if stock markets continue to rally.

Today's Economic Data 30th July

U.K 07:00 Nationwide House Prices (July)

GER 09:00 Unemployment (July)

EU 10:00 EC Business Climate Index (July)

EU 10:00 EC Economic Sentiment (July)

- Consumer Sentiment

- Industrial Sentiment

- Services Sentiment

U.S 13:30 Jobless Claims (w/e 25th July)

29 July 2009

The Pound declines against the Dollar, after disappointing quarterly results from BP Plc saw stocks decline for the first time in 12 days

GBPEUR/GBPUSD

The Pound advanced against the Dollar yesterday and challenged so-called resistance levels near $1.6550 in London, as global stocks rallied for a 12th straight day. Standard Chartered Plc also raised its forecast for the UK currency and the Pound subsequently rallied to its highest level in three days versus the U.S Dollar and recorded a high of 1.16 against the Euro.

The FTSE 350 Banks Index of British financial stocks rose to levels not seen since December and UK stocks were on course for a record winning streak, led by Lloyds Banking Group Plc and Sage Group Plc. The FTSE 100 added another 0.4% in London and the benchmark for UK equities has climbed for 12 successive days, the longest winning streak since 1984, as a record number of U.S companies beat analysts' earning estimates.

The FTSE 100 has rebounded 31% since March 3rd, amid speculation that the worst of the global recession is easing. Lloyds Banking Group Plc climbed 4.1%, after naming Win Bischoff as chairman to replace Victor Blank, who is retiring. However, UK stocks slid 0.6% in New York, as the FTSE 100 Index failed to hold on to its longest winning streak on record.

Shares in BP Plc dropped after saying that profit shrunk 53% in the last quarter and that there is "little evidence" of a recovery in demand. A positive close last night would have pushed the measure to a record 12th straight advance and the Pound declined against the majority of the major currencies, as risk appetite subsided.

The performance of the Pound yesterday perfectly illustrates the correlation between stock market sentiment and risk appetite and the UK currency relinquished earlier gains, after the FTSE 100 failed to rally for a 12th straight day. The benchmark of UK equities has still rebounded 30% since the low on March 3rd, amid speculation that the worst recession since the Second World War is abating.

The Pound fell back towards $1.6350 against the Dollar last night but bounced back from lows against the high-yielding currencies, as an element of risk aversion crept back into the market. Nevertheless, Standard Chartered Plc said yesterday that the Pound will reach $1.70 against the Dollar in the third quarter and $1.75 by year-end.

Jeremy Stretch, a senior currency strategist at Rabobank International, said that "equities and risk appetite continue to be the main driving factor of the market. There are some signs of cautious optimism coming in." The Pound may also rally to the highest level in a year against the Japanese Yen, after UK bond yields rose to the highest among the Group of Seven nation for the first time since October.

Bank of England policy maker Andrew Sentence said last week that the central bank may pause its £125 billion bond purchasing program, if officials determine that they have done enough to bolster the economy. Stretch also stated that "if we can see a degree of normality coming back into monetary policy in the next year, sterling will gain traction."

The Pound will remain susceptible to swings in risk sentiment but there is also speculation on what the Bank of England will do on August 6th. Any indication that they will extend the quantitative easing program to November will severely undermine confidence in the UK currency but a move back towards conventional policy techniques would propel the Pound towards the yearly highs against the Dollar and the Euro.

In terms of economic data, UK house prices rose for the first time in 17-months in June, led by gains in London. The report from the Land Registry showed that the average price of a home in Britain increased 0.1% from the previous month, the first gain since January 2008. The report adds to recent evidence that the property market is stabilising, while the economy remains entrenched in a serious recession.

Elsewhere, the latest Confederation of British Industry retail sales survey recorded a modest improvement on the month, and although investors had expected a slight larger gain, the data suggests that consumer spending is still holding relatively firm. However, overall confidence is still liable to be fragile given the massive UK debt burden.

EUR/USD

The Euro continued to test upper resistance levels against the Dollar yesterday and pushed towards levels around $1.43 in early Europe. U.S consumer confidence weakened modestly to a level of 46.6, from 49.3 the previous month. This was the second successive decline and reflected a surge in unemployment that threatens to undermine household spending.

Stocks slumped and Treasuries rose after the report, as consumer spending accounts for roughly 70% of U.S gross domestic product, and any renewed decline would temper a recovery in the economy. The Standard & Poor's 500 Stock Index tumbled 0.8% and the Dollar subsequently rallied as traders sought the security of relative safe haven assets.

Overall risk appetite was generally weaker through the course of the day and the Euro failed to advance against the Dollar, amid speculation that Latvia had devalued its currency. In this environment, the Dollar recovered from the lowest levels in seven weeks and held steady around the $1.42 level ahead of the Today's Economic Data today.

Today's Economic Data 29th July

U.K 09:30 Consumer Credit (June)

U.K 09:30 Mortgage Applications (June)

U.S 13:30 Durable Goods Orders (June)

U.S 19:00 Federal Reserve Publishes Beige Book

28 July 2009

The Pound climbs against the Dollar, amid an overall improvement in risk appetite

GBPEUR/GBPUSD

The Pound rallied for the first time in three days against the Dollar yesterday, increasing 0.4% in London to a high of $1.65, as widespread U.S currency weakness allowed a challenge above significant resistance levels. Sterling also secured support from the overall improvement in global risk appetite, as UK stocks climbed and extended the longest stretch of gains since 2004.

The benchmark FTSE 100 Index swung between gains and losses through the course of the day but the increase in mining companies and gains in purchases of new homes in the U.S contributed to a 0.2% rally on the day. A record number of U.S companies from Goldman Sachs Group Inc to Caterpillar Inc beat analysts' projections for earnings estimates in the second quarter, increasing an air of confidence in financial markets and weakening the Dollar.

The FTSE 100 has now rebounded 31% since the low on March 3rd, amid speculation that the worst global recession since the Second World War has reached the bottom. U.S new home sales increased 11% in June, the biggest monthly gain in eight years, while the number of unsold properties saturating the market dropped to the lowest level in over a decade.

The Pound also rose 0.4% against the Euro and touched upon a high of 1.16 by the close of the European session last night. The difference between 10-year gilt yields widened to 260 basis points, from 240 basis points at the start of July. The steepening of the yield curve indicates investors increased bets that growth and inflation will begin to accelerate.

Inflation expectations rose for a third straight day as crude oil prices rose to the highest level in more than three weeks. The UK inflation rate will rise at the steepest pace among the Group of Seven nations next year and some economists believe that the Bank of England will be at the forefront of a global push to raise interest rates.

Willem Buiter, a professor at the London School of Economics and a former Central Bank policy maker, said that "the Bank of England could be the first out of the stable. If it goes too early, it might abort a fragile recovery and create a painful appreciation in the Pound. If too late, it may perceived as weak on inflation."

Higher interest rates will bolster the Pound, which has slumped close to 17% against the Dollar over the past year, and keep a lid on inflation as the economy rebounds from the worst slump in fifty years. Gains in Sterling would, however, come at the expense of exporters, which have reported higher sales on the lower value of the Pound.

The monetary policy committee, led by the governor Mervyn King, will prepare new forecasts this week for the August 6th interest rate decision. After the nine-member panel cut the benchmark interest rate to a record low of 0.5% in March, the UK should see 'some evidence of positive growth in the second half of the year.'

There are still very serious concerns over the economic outlook and the UK's debt position, especially after last week's GDP data, and rating agency Fitch warned that the recovery signs in the economy were probably not sustainable. The near-term downside risks to Sterling persist and reports yesterday indicated that the Bank of England may extend its asset-insurance program until November.

According to Carl B. Weinberg, chief economist at High Frequency in Valhalla, "the only tool the Bank of England has to influence the economy is quantitative easing, and we see no argument for ending that now. The gilt market is unsure of this, so we expect the bank's announcement to spark a rally in gilts and a flattering of the yield curve."

In the event that policy makers would extend or increase the quantitative easing program, the Pound would decline significantly against the major currencies and all eyes will be on the next Bank of England rate announcement in early August. HSBC Holdings Plc raised its pound-dollar forecast last week for the end of 2010 to $1.75, from $1.60, citing the likelihood that the Bank of England will interrupt its bond buying program next month and raise interest rates before the Federal Reserve.

The Bank of England reported that credit conditions had improved during the second quarter, but doubts over bank lending persisted and there is a very important risk that confidence in the economy will deteriorate further over the next week weeks. However, with the Dollar still on the defensive and risk appetite holding firm, the UK currency has continued to trade above $1.65 this morning.

EUR/USD

The Euro maintained a firm tone in Asian trading yesterday and continued to challenge resistance levels through the course of the day. The Dollar fell towards its lowest level in seven weeks versus the single currency, as the global rally in stocks added to recent evidence that investors are shifting their focus towards high-yielding assets.

The Euro benefited from a stronger-than-expected increase in German consumer confidence to the highest level for over a year, while the increase in U.S new home sales further diminished the allure of Dollar denominated assets as a refuge. The U.S currency managed to find support at the lower levels and was able to recover back towards the $1.4230 region last night.

Investors will continue to monitor official comments on the Dollar closely this week, with the U.S Treasury Secretary Timothy Geithner due to hold further meetings with Chinese officials. There will also be a series of press conferences today, which could potentially trigger further market volatility. The Dollar was unable to strengthen back through the $1.42 level this morning and remain susceptible to the underlying confidence in stocks.

Today's Economic Data 28th July

U.K 11:00 Confederation of British Industry Distributive Trades Survey (July)

U.S 14:00 Case Shiller House Prices (May)

U.S 15:00 Consumer Confidence (July)

27 July 2009

The Pound declined against the majors on Friday, as UK GDP contracted by more than twice as much as initial forecats

GBPEUR/GBPUSD

Following on from last week, the Pound traded close to the highest level this month against the Dollar, touching a high of $1.6580 on Thursday, as improvements in retail sales and mortgage approvals prompted speculation that the recession is abating and the Bank of England will increase interest rates. The UK currency also rose for a second day against the Euro and the Japanese Yen, as a report from the Office of National Statistics showed that sales increased last month at four times the pace expected.

Tentative signs of improvement in the UK economy and store discounts encouraged consumers to step up spending, as sales climbed 1.2% from May, when they plunged 0.9%. Prior to the report, economists had predicted a smaller 0.3% increase and subsequently rallied against the majority of the 16-most actively traded currencies.

The rising unemployment rate still remains a major concern to consumers and that may keep a lid on spending in the medium-term. Bean also said this week that unemployment will probably keep increasing. The number of people out of work rose to 2.38 million in the quarter through May and the British Chamber of Commerce said this month that unemployment may reach 3.2 million by the middle of next year.

There was also an increase in BBA mortgage approvals according to the latest data with approvals at a 15 month high and this helped maintain the mood of greater confidence towards the UK housing sector, which also underpinned risk appetite. Loan approvals for home purchases increased to 35,235, from 31,919 in May and that level has almost doubled in seven months.

The Bank of England may raise UK interest rates as the first step towards exiting its quantitative-easing program. David Bloom, a currency strategist at HSBC Holdings Plc, said yesterday that "we find the idea that the UK will raise rates next year but the U.S will stand pat a very powerful one. This should be just the event to see the Pound gain."

HSBC Holdings Plc raised its Pound-Dollar forecast for the end of 2010, citing the likelihood that the Bank of England will interrupt its asset-buying program next month and raise interest rates before the Federal Reserve. The Pound will climb to $1.75 by the end of next year, despite previous forecasts that the Pound's "fair value" against the Dollar through 2010 was $1.60.

The UK currency has climbed 14% against the Dollar this year, after depreciating 26% in 2008, amid speculation that the worst of the recession is over. The Bank of England's benchmark interest rate will rise to 1.25% by the end of 2010, from a record low of 0.5% currently. Bloom also stated that "the Pound's longer-term fortunes are looking brighter, especially since the Bank of England's quantitative-easing program is expected to take a clear breather soon."

The Pound is still being driven to a large extent by trends in risk appetite and firmer equity markets continued to offer significant support yesterday. UK stocks climbed for an unprecedented ninth day on Thursday, the longest stretch of gains since 2004. The FTSE 100 Index gained 1.1% in London, while the Dow topped at 9,000 for the first time since January.

The Pound was unable to hold on to its recent gains on Friday, as the UK currency fell by the most in a month against the Euro, following reports that the UK economy shrank by more than twice as much as preliminary forecasts.The Pound also fell considerably versus the U.S Dollar, paring a second consecutive weekly advance, after the Office of National Statistics said gross domestic product contracted 0.8% in the first quarter.

The UK economy was expected to shrink just 0.3% in the three months through June, as a record annual slump in construction, banking and business services kept Britain entrenched in the worst recession for a generation. From a year earlier, the economy contracted 5.6%, the most since records began in 1955.

Bank of England policy maker Andrew Sentence said last week that the UK economy may start to pick up in the second half of 2009 but Gordon Brown's Labour Party trails the Conservatives in the polls, less than a year before the general election. George Buckley, chief UK economist at Deutsche Bank AG, said that "it's a very sizeable recession indeed. I think we've seen the worst, but what will the post-recession environment look like? There is a risk in the medium term that growth will be weaker than we're used to."

The Pound dropped as much as 0.5% against the Dollar following the report and Friday's data is the first among the Group of Seven nations for the second quarter. The International Monetary Fund predicts that the UK will contract 4.2% this year, compared with 4.8% in the Euro-zone and 2.6% in the U.S. Lee Hardman, a foreign exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd, said that "the numbers were disappointing, they suggest that the economy is still on an unstable footing and that hit the Pound."

The Bank of England said on March 5th that it would begin purchasing bonds as part of a so called quantitative easing policy, designed to lower borrowing costs and revive the economy. Policy makers pledged to buy £125 billion of assets, after getting permission from the Treasury to purchase £150 billion.

Andrew Sentence gave an indication last week that the bank will make a judgment call on whether they need to add further fiscal stimulus, once the new quarterly predictions are available. Jason Simpson, a UK interest rate strategist at Royal Bank of Scotland Group Plc, said that "what Sentence said hints to the fact that quantitative easing might be coming to a pause. We've also seen a risk rally with equities pushing higher, and that's a challenge for bond markets."

The Pound dipped to lows below $1.64 against the Dollar on Friday, but the underlying improvement in global risk appetite helped prevent further losses. Hometrack reported that UK house prices were steady during July, which helped maintain some degree of optimism over trends and also offered Sterling protection with the Pound back above $1.64 this morning.

EUR/USD

The Euro advanced to a near seven week high against the Dollar on Friday, amid reports that the contraction in European manufacturing and services industries slowed by more than initial forecasts. German business confidence also rose and the Euro subsequently posed a second weekly gain versus the lower-yielding currencies.

The single currency also rallied by the most in a week against the Pound, as signs of an improvement in the European economy indicated that the global recession is reaching a bottom. The currency market is still closely correlated with the broad swing in risk sentiment and the Euro is likely to rally further providing equity markets continue to improve.

The Dollar also declined on Friday after the revised University of Michigan consumer confidence data recorded a slight increase from the provisional figure. The data did not have a significant impact on the market and the U.S currency strengthened to beyond $1.42 versus the Euro. Investors will be monitoring official comments on the Dollar closely this week, with U.S Treasury Secretary Timothy Geithner due to gold meetings with Chinese Officials.

Today's Economic Data 27th July

U.K 00:01 Hometrack House Prices (July)

EU 09:00 M3 / 3 Month Moving Average (June)

U.S 15:00 New Home Sales (June)

24 July 2009

The Pound rallies back against the Dollar, as retail sales and mortgage approvals prove better-than-expected

GBPEUR/GBPUSD

The Pound traded close to the highest level this month against the Dollar, touching a high of $1.6580 in London, as improvements in retail sales and mortgage approvals prompted speculation that the recession is abating and the Bank of England will increase interest rates. The UK currency also rose for a second day against the Euro and the Yen, as a report from the Office of National Statistics showed that sales increased last month at four time the pace expected.

Tentative signs of improvement in the UK economy and store discounts encouraged consumers to step up spending, as sales climbed 1.2% from May, when they plunged 0.9%. Prior to the report, economists had predicted a smaller 0.3% increase and subsequently rallied against the majority of the 16-most actively traded currencies.

William Morrison Supermarkets Plc said earlier this week that earnings will beat preliminary forecasts, while the UK housing market slump has shown signs of easing, and Bank of England Deputy Governor Charles Bean says that the economy may now have stopped contracting. Alan Clarke, an economist at BNP Paribas SA, said that "this is going to lead to near-zero GDP in the second quarter. We're past the worst, but we're not heading for a boom.

The rising unemployment rate still remains a major concern to consumers and that may keep a lid on spending in the medium-term. Bean also said this week that unemployment will probably keep increasing. The number of people out of work rose to 2.38 million in the quarter through May and the British Chamber of Commerce said this month that unemployment may reach 3.2 million by the middle of next year.

UK gross domestic product slumped 2.4% in the first quarter of the year, the most in 50-years, and reports this morning will probably show that the economy contracted 0.3% in the second quarter, indicating that the recession is abating. Bank of England policy makers voted unanimously to maintain their asset-insurance program, saying that there was no clear evidence to support an increase in the plan, as the risks to the economy had probably diminished.

There was also an increase in BBA mortgage approvals according to the latest data with approvals at a 15 month high and this helped maintain the mood of greater confidence towards the UK housing sector, which also underpinned risk appetite. Loan approvals for home purchases increased to 35,235, from 31,919 in May and that level has almost doubled in seven months.

The UK property slump is showing signs of easing and banks have become more willing to lend. David Dooks, statistics director at the British Bankers' Association, said that the "number of new home loans approved by the high-street banks are recovering from the very low level last November, and so far this year gross mortgage lending has topped £50 billion."

The Bank of England may raise UK interest rates as the first step towards exiting its quantitative-easing program. David Bloom, a currency strategist at HSBC Holdings Plc, said yesterday that "we find the idea that the UK will raise rates next year but the U.S will stand pat a very powerful one. This should be just the event to see the Pound gain."

HSBC Holdings Plc raised its Pound-Dollar forecast for the end of 2010, citing the likelihood that the Bank of England will interrupt its asset-buying program next month and raise interest rates before the Federal Reserve. The Pound will climb to $1.75 by the end of next year, despite previous forecasts that the Pound's "fair value" against the Dollar through 2010 was $1.60.

The UK currency has climbed 14% against the Dollar this year, after depreciating 26% in 2008, amid speculation that the worst of the recession is over. The Bank of England's benchmark interest rate will rise to 1.25% by the end of 2010, from a record low of 0.5% currently. Bloom also stated that "the Pound's longer-term fortunes are looking brighter, especially since the Bank of England's quantitative-easing program is expected to take a clear breather soon."

Bank of England policy makers Andrew Sentence also said yesterday that the Central Bank may pause its bond purchasing program and shift to a "watching" stance next month, providing officials determine that they have done enough to nurture an economic recovery. However, there is a high degree of uncertainty over the situation and the Pound may swing between gains and losses in the build-up to the August announcement.

The Pound is still being driven to a large extent by trends in risk appetite and firmer equity markets continued to offer significant support yesterday. UK stocks climbed for an unprecedented ninth day yesterday, the longest stretch of gains since 2004. The FTSE 100 Index gained 1.1% in London, while the Dow topped at 9,000 for the first time since January.

Today's Economic Data 24th July

EU 09:00 Flash PMI - Composite (July)

- Manufacturing

- Services

GER 09:00 Ifo Index (July)

U.K 09:30 Preliminary GDP (Q2)

U.S 14:55 Michigan Sentiment (July Final)

23 July 2009

The Pound rallied against the U.S Dollar last night, led by a revival in risk appetite

The Pound plunged close to its lowest level in over a week against the Euro yesterday, while the UK currency also recorded further losses against the Dollar, amid reports that UK house price declines will persist until 2012. The National Institute of Economic and Social Research said that house prices will decline as the economy continues the shrink until the fourth quarter.

Home values will resume their decline because recent gains were driven by a fundamental lack of homes on the market, while the number of mortgages remains 65% lower than before the financial crisis. The NIESR also anticipates falling home values will hurt consumer spending and gross domestic product will keep falling until the fourth quarter.

Simon Kirby, an economist at NIESR, said yesterday that "there has been talk of stabilisation and some recovery in the housing market, but we don't think this is the case. We only see growth in the housing market returning in 2012." The Bank of England confirmed this week that mortgage lending may strengthen over the coming months, while the Nationwide Building Society said that house prices increased in June.

Despite speculation that growth will return later this year, the economy has yet to emerge from the recession, after contracting the most since 1958 in the first quarter. Falling house prices and rising unemployment will curtail the pace of consumer spending in the next two years and encourage an increase in the household savings ratio to the highest level since 1997.

Government borrowing is expected to peak at 12% of GDP in the fiscal year ending March 2010, or 165.7 billion, before shrinking to 7.5% of the economy, or £121.6 billion. That's still way in excess of the Chancellors forecast in April, suggesting that tax increases, spending cuts and longer working lives may be needed to repair the public finances.

The Pound fell to a low of $1.63 against the Dollar in London, as the FTSE 350 Banks Index lost as much as 1.5%, following reports in the Daily Telegraph that Barclays Plc and Royal Bank of Scotland Group Plc will require additional funding. UK stocks rebounded from earlier losses, with the benchmark FTSE 100 Index rising 0.4%, after U.S home prices unexpectedly rose in May.

The revival in risk appetite provided some underlying support to the Pound and the UK currency rose higher through the course of the day, amid reduced demand for the relative security of lower-yielding assets. Gilts fell and the Pound rallied after the minutes from the Bank of England's last policy meeting showed that policy makers voted unanimously against boosting asset purchases.

The nine member monetary policy committee, led by the governor Mervyn King, kept the benchmark interest rate unchanged at a record low of 0.5% and said that there was no clear evidence to support an increase in their asset-insurance program, as the risks to the economy had probably diminished. However, the accompanying statement also indicated that policy makers will review the size of the money-printing plan in light of new economic forecasts in August.

The Pound had been under severe selling pressure amid speculation that policy makers would increase its quantitative easing program beyond £125 billion in order to revive lending conditions. The minutes said that "little evidence has emerged since May to change the committee's views about the broad shape of the prospects for the economy in the medium term, although the downside risks to gross domestic product in the near-term had probably diminished."

Policy makers didn't allude to investor expectations for an increase in the size of the plan, which led to a sell-off in government bonds after the July decision to keep it unchanged. While recent economic data has indicated that the housing slump may have eased and the recession has shown some signs of moderating, a recovery has yet to become entrenched in the economy.

Nick Kounis, an economist at Fortis Bank, said that "their communication leading up to the meeting was not all it should have been because expectation in the market was that they would extend it. The minutes are consistent with the idea they're edging towards stopping the program or staying with the current level of purchases. They sound more optimistic on the economy."

The Pound rose against the Dollar after the release of the minutes, rising to a high of $1.65 during Asian trading. Euro and Dollar buyers would still be well position to work a stop order in the market to protect against a sudden downward move because there is still a possibility that policy makers will extend the program in August if economic indicators point to a worsening slump.

The UK inflation rate dropped in June below the Bank of England's 2% target for the first time since September 2007, as the recession sapped price pressure in the economy. Consumer prices rose just 1.8% from a year earlier, sparking concerns over deflation and diminishing the prospect over a near-term increase in borrowing costs.

Elsewhere, a UK index of manufacturing orders deteriorated in July to the worst level in 17-years, as the recession curtailed demand for British-based goods. The report from the Confederation of British Industry showed that a gauge of factory orders fell to minus 59, the weakest reading since January 1992. The report suggests that a weaker Pound has yet to bolster factory production, as the UK slowly recovers from the worst recession in a generation.

EUR/USD

The improvement in risk appetite hampered Dollar sentiment yesterday, as the U.S currency remain trapped in a relatively narrow range against the Euro, circulating around the $1.42 level. The European economic data was weaker-than-expected with a further small monthly decline in industrial orders, as the worst recession in sixty-years sapped demand for exports.

Companies across the Euro-zone have halted business investment, hurting orders for capital goods, and cut jobs to cope with the worldwide economic slump. However, there are still signs that the economy is stabilising, after contracting by a record in the first quarter. Governments worldwide have announced about $2 trillion in economic stimulus programs, including packages to spur industrial orders.

The reported Morgan Stanley losses together with a warning from Wells Fargo over an increase in bad-debt provisions unsettled confidence to some extent, which initially triggered some defensive demand for the Dollar. The U.S currency was unable to gain any momentum and failed to mount a significant rally on Euro support levels in the $1.41 region.

Today's Economic Data 23rd July

EU 09:00 Current Account (May)

U.K 09:30 Retail Sales (June)

U.S 13:30 Initial Jobless Claims (w/e 18th July)

U.S 15:00 Existing Home Sales (June)

22 July 2009

The Pound declies against the majors, ahead of the minutes from the Bank of England's last policy meeting

GBPEUR/GBPUSD

The Pound declined significantly against the U.S Dollar yesterday, falling to a low of $1.6310 during Asian trading, as a report showed that the UK's budget deficit climbed in June to the most for the month since comparable records began in 1993. The UK currency also lost ground against the Euro, falling towards 1.1500 in London, as the report stoked concerns that the government will struggle to find buyers for its assets.

The latest public sector borrowing data revealed that Britain had a £13 billion budget deficit in June, as the worst recession in a generation ravaged tax revenue and increased unemployment. The shortfall compared with £7.5 billion just a year earlier, as tax income fell 5.7%, while government spending increased 2.8%.

The scale of borrowing has ignited a political dispute with the Conservatives accusing the Prime Minister Gordon Brown of misleading voters by denying that deep spending cuts are inevitable after the next general election. The International Monetary Fund warned last week that Brown risks putting pressure on the Pound unless he commits to a "credible" plan to narrow the deficit once the recession is over.

Ruth Lea, an economist at Arbuthnot Banking Group Plc, said in an interview following the report that "these figures are just simply appalling. When there is a new government they have to do something pretty radical to retain the confidence of the markets. This country is in for a very tough time over the next three or four years."

Despite these comments and escalating concerns over the UK's debt position, The FTSE 100 Index rose for a seventh consecutive day, the longest stretch of gains in four years, as William Morrison Supermarkets Plc said that earnings will exceed forecasts and U.S companies posted better-than-expected results.

UK stocks rose another 0.9% in London to 4,481.17 and the measure has rallied for the past seven trading days, the longest stretch of gains since July 2005. The FTSE 100 has jumped 8.6% over the past week, as companies from Goldman Sachs to Johnson & Johnson reported profit that beat analysts' estimates.

The resilience in risk appetite is somewhat surprising considering the degree of pessimism for the economic outlook but the Pound still plunged from the highest level this month against the Dollar. The budget shortfall was actually an improvement on the revised £18.6 billion for May and compared favourably with expectations of a £16 billion deficit.

The budget deficit is still heading towards 14% of gross domestic product in the current fiscal year and the Bank of England Deputy Governor Charles Bean still expects the second quarter growth to be negative. Markets will remain extremely sensitive to growth consideration, as any evidence that a recovery is stalling would reinforce debt concerns and increase downward pressure on Sterling.

Gilts also reversed earlier declines yesterday, after the Federal Reserve Chairman Ben Bernanke told Congress in his semi-annual testimony that policy makers will keep interest rates "exceptionally low". Jeremy Stretch, a senior strategist at Rabobank International, said that "the question mark over public finances remain a short-term negative for Sterling. It's hardly likely to boost sentiment."

Stretch also identified so called support at $1.6395 versus the Dollar, as an area where buy orders for the currency may be clustered. However, the Pound plummeted through that level with alarming ease on Tuesday and looks poised for further downward moves ahead of the minutes from the Bank of England's last policy meeting.

The Monetary Policy Committee minutes will be watched very closely this morning for any indication of the quantitative easing debate with Sterling vulnerable to any suggestion that bond buying will be increased beyond £125 billion in August. Euro and Dollar buyers are well positioned to consider the use of a stop order in the market and protect against a sustained downward move.

EUR/USD

The Dollar rebounded from a six-week low versus the Euro yesterday and also registered sharp gains against the majority of the 16-most actively traded currencies, amid concerns that CIT Group Inc may file for bankruptcy, renewing demand for the Dollar as a refuge. In his semi-annual testimony to Congress, the Fed Chairman Ben Bernanke stated that there were tentative signs of stabilisation in the economy and the that the pace of the decline appeared to have slowed significantly.

Bernanke also reiterated that the bank did have a credible exit strategy from the ultra-loose interest rate policy that has seen rates taken to a range between zero and 0.25%. His comments illustrate that the Fed is very sensitive to the issue of maintaining confidence in the U.S assets, particularly the Treasury market and the Dollar.

The Fed Chairman also stated that the Fed would maintain a highly accommodative monetary policy for an extended period and there is still very little chance of a near-term tightening given the cautious tone over the economy. Risk appetite faded to some extent following Bernanke's comments, while there was also fresh speculation that CIT would file bankruptcy.

Today's Economic Data 22nd July

U.K 09:30 Bank of England Monetary Policy Committee Minutes of 8/9 July Meeting

EU 10:00 Industrial Orders (May)

U.K 11:00 Confederation of British Industry Industrial Orders (July)

21 July 2009

The Pound advanced the highest level in a month against the Dollar, rising to a high of $1.6550 overnight

GBPEUR/GBPUSD

The Pound rose to the highest level in a month against the Dollar, rising to a high of $1.6550 last night, while the UK currency also advanced versus the Euro and Japanese Yen, as stocks rallied and survey showed that demand in the housing sector had picked up. The benchmark FTSE 100 Index rallied for a sixth consecutive day, the longest streak of gains since January, as higher commodity prices triggered a rally in raw-material producers.

The overall improvement in risk appetite is providing underlying support for Sterling and the UK currency consolidated gains above the so-called resistance level at $1.6450, prior to this morning's public sector net borrowing report. The FTSE 100 rallied 6.3% last week, the biggest weekly gain since January, after U.S companies from Goldman Sachs Group Inc to Johnson & Johnson reported earnings that beat analysts' estimates.

Rio Tinto Group and BHP Billiton Ltd added more than 3% on the day, while banking shares also rose with Lloyds Banking Group Plc gaining 6.7%, after a report that the lender may post a profit for the first six months of the year. The FTSE 100 has pared its drop from June 1st to 1.4%, after a three-month surge pushed valuations to the highest level in five years.

The Pound recorded modest gains against the Euro yesterday, holding above 1.1600 in London, amid speculation that the U.S commercial lender CIT Group Inc is edging closer to fending off bankruptcy. Elsewhere, a report from Rightmove Plc showed that the average cost of a home in Britain increased 0.6% this month, after falling 0.4% in June.

Gilts fell yesterday as gains in the stock market reduced demand for the relative security of fixed-income assets. CIT may announce an agreement for $3 billion in financing from bondholders as soon as today and the funds would give the company the chance to restructure its debt outside of bankruptcy.

Home sellers raised asking prices this month to meet increased demand from buyers, as the average cost of a home rose to £227,864, while prices in London recorded the first annual gain of the year so far. A separate report from the Bank of England showed that U.K mortgage approvals by the nation's six biggest banks increased last month to the highest level since December.

Ian Stannard, a currency strategist at BNP Paribas SA, said that "some positive news in the financial markets over the weekend and benign economic data are boosting sentiment and will provide support for Sterling in the very near term. There are still a lot of risks for sterling, and I think the rebound is quite fragile."

The Pound rallied 1.3% against the U.S Dollar yesterday to the highest level since June 30th, before retracing back towards the support at $1.6450 in anticipation of the public sector borrowing data this morning. Stannard expects Sterling to weaken to $1.53 over the next quarter and a number of analysts are expecting the UK currency to be at $1.59 versus the Dollar by the end of September.

In stark contrast, Nicole Elliott, a senior technical analyst at Mizuho Corporate Bank Ltd said that the Pound may breach the next point of resistance at $1.6550 and then $1.6625. Elliott cited an ichimoku cloud chart, which shows midpoints of historic highs and lows. A cloud chart is used to show levels where buy and sell orders may be clustered.

The correlation with the Pound's performance and the overall tone of risk sentiment has become increasingly prevalent this year and the UK currency will continue to rally, providing that stock market sentiment continues to improve, while crude oil also rose for a fourth consecutive day yesterday. UK inflation dropped in June below the Bank of England's 2% target for the first time since September 2007, as the worst recession in a generation sapped price pressures.

The Deputy Governor of the Bank of England Charles Bean said last week that the economy has probably hit rock bottom and will slowly pick up over time. A report from the Council of Mortgage Lenders said yesterday that UK gross mortgage lending rose 17% in June from the previous month. While the Bank of England also reported that the number of home loans granted by six major banks rose to 51,000, the highest amount since records began in December.

According to Mizuho Corporate Bank Ltd, the Pound and the Australian and Canadian Dollars are likely to gains this week as earnings and economic data beat economists' expectations. "The Pound correlates well with global banking industry expectations, the Canadian Dollar is a convenient method to express commodity opinion, and the Aussie is deemed as a higher-yielding play amongst major currencies."

There are still very important risks surrounding the UK debt situation and only a small shift in sentiment could trigger a sharp downward adjustment in the Pound. To that end, confidence could deteriorate if there is a wider-than-expected deficit int he latest government borrowing data due for release this morning. Public sector net borrowing is expected to have been £18 billion, below the record outcome of £19.8 billion, but by some way the largest June deficit since comparable records began in 1993.

EUR/USD

The Dollar plunged to a six-week low against the Euro yesterday, after gains in global stocks reduced the appeal of the relative security of dollar-denominated assets, while speculation that CIT Group Inc will avoid bankruptcy encouraged demand for higher-yielding assets. The U.S currency declined 0.9% to a low of $1.4343 versus the Euro, reaching the weakest level since June 5th.

There was further relief over a $3 billion support package for the struggling lender, which boosted risk appetite and sent stocks higher worldwide. There was little in the way of U.S economic data releases, but a further 0.7% increase in leading economic indicators for June increased a sense of optimism that the economy is through the worst of the recession.

Positive signs of growth in the economy are still tending to undermine the Dollar on improving risk appetite, although is conceivable that sentiment will start to shift in favour of the U.S currency, especially if there is any suggestion over higher interest rates. Investors will be watching the Fed Chairman Ben Bernanke's testimony to Congress today and although the impact may be curbed following the release of media comments that policy will need to be tightened at some stage.

Today's Economic Data 21st July

U.K 09:30 Public Sector Net Borrowing (June)

CAD 14:00 BoC Rate Announcement

20 July 2009

The Pound declined against the majors, as global risk sentiment deteriorated

GBPEUR/GBPUSD

Following on from last week, the Pound declined against the Dollar and the Euro, snapping a three day rally, as investors sought the security of government debt on concerns that the crisis in the world's banking industry has further to run. The yield spread between two and 10-year securities widened to the most in a month, after the U.S commercial lender CIT Group Inc said that it probably won't receive a federal bailout, fueling speculation that it will file for bankruptcy.
The UK currency maintained a generally steady tone in London as it remained resilient, but was unable to make any strong headway on Thursday, encountering strong resistance around 1.1650 versus the Euro and $1.6400 against the U.S Dollar. The International Monetary Fund warned that the UK government may need to take further action to stabilise the financial sector, which undermined confidence to some extent.

The IMF also reported that the Prime Minister Gordon Brown risks putting pressure on the Pound unless he produces a "credible plan" to curb Britain's budget deficit. In its annual assessment, the IMF said in a statement that "the success of the current policy packages hinges on the trust of the public in the solvency of the government."

The Fund predicts that UK debt may double to almost 100% of UK gross domestic product in the next five years, a level that Standard & Poor's said in May was incompatible with Britain's top AAA credit rating. Brown faces the prospect of an election within the next year and has resisted talking about spending cuts, saying that the economy needs a boost form government funds.

Concerns over the UK debt position has undermined confidence in financial markets, as stocks plunged over night and weakened the Pound, with an element of risk aversion saturating the market. The Pound may face a sterner test over the coming weeks if there is a sharp deterioration in international risk sentiment and renewed pressure on the banking sector.

The Pound edged back below $1.64 on Friday as investors became cautious with no economic releases to guide direction. Henrik Gullberg, a currency strategist at Deutsche Bank AG, said that the Pound's 13% rally against the Dollar this year is "overdone" and it may decline towards its "near-term fair value" of $1.55 in the coming months. "The Pound is overvalued, this doesn't mean that I'm bearish the Pound, but it has moved out of line with everything else around it this year."

A gauge of technical analysis indicates that the Pound will struggle to break the resistance at $1.6450 and a decline below $1.60 will trigger further downward moves towards the $1.54 level. However, in the short-term the UK currency is being supported by the resilience in risk appetite and UK stock advanced for a fourth day on Friday, as earnings at JP Morgan Chase & Co boosted banking shares.

Lloyds Banking Group Plc led a measure of bank shares to a one-month high, after JP Morgan posted a 36% increase in second quarter profit. The benchmark FTSE 100 Index added 0.4% on the day and is heading for the best weekly performance since March. The FTSE 100 has rallied 5.7% since July 10th, after companies including Goldman Sachs Group Inc reported earnings that beat 'analysts' estimates.

The Pound declined against the Dollar for the first time in five days, as concerns that CIT Group Inc would go bankrupt stocked demand for the relative security of U.S assets. The UK currency also came under selling pressure above $1.64 on Friday and weakened significantly ahead of the U.S open with lows around $1.6265.

The IMF warnings from Thursday also played an important role, as markets took a close look at the UK debt position and there was also some speculation that the economy could be hit by the escalating swine-flu outbreak. The degree of risk appetite will remain the primary driver of financial markets and selling pressure was enhanced when global confidence faltered.

The Pound was able to recover towards the $1.6350 region in New York, as confidence stabilised, while there was also a modest rally to 1.1600 versus the Euro. There will still be significant fears over the debt position, especially if there is evidence that the economic recovery is stalling, as this would further increase pressure on the fiscal situation.

The Pound also fell against the Japanese Yen, as CIT, the 101-year old finance company that failed to secure U.S guarantees for its debt, said that it's still in talks with potential lenders. Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd, said that "the market is driven by risk sentiment and that's reflected in how the Pound performed against safer currencies such as the Yen.

The UK currency may come under further selling pressure once it falls through $1.63 because of stop-loss orders below that level. Stop-losses are orders traders place to sell a currency when it reaches pre-set levels. The Prime Minister Gordon Brown also risks putting further pressure on Sterling unless he curbs the country's budget deficit.

The Pound will remain susceptible to the aggressive swings in risk appetite, which came under further scrutiny on Friday, following reports of bomb blast in Indonesia. In terms of economic data, the focus will fall on the July minutes from the Bank of England's last policy meeting, which will be scrutinised for the tone of the discussions about the extension to the Bank's quantitative easing program.

Recent comments from a number of committee members have reassured that the failure to act in July did not mean that the Bank had finished quantitative easing. Investors still expect an extension to the program to be announced in August and any such move would place a significant amount of downward pressure on Sterling.

Elsewhere, the preliminary reading of UK gross domestic product in the second quarter is expected to show that the economy contracted 0.3% in the three months through June, the best performance in year. Retail sales should rebound again in June after the surprising decline in May, while the Confederation of British Industry industrial survey and public sector borrowing figures are also scheduled for release.

EUR/USD

The Euro was unable to push above the $1.4150 level against the Dollar on Friday, as sell orders remained concentrated in this region. The U.S currency strengthened to highs around $1/4065 ahead of the U.S data releases as global risk appetite was slightly weaker. Sentiment in financial markets were uneasy over the implications of any CIT bankruptcy but U.S housing data was stronger than expected with starts rising to an annual rate of 0.58 million for June.

There were no major Euro-zone developments during the day to guide the Euro but the Dollar was unable to rally through the $1.4050 level, edging weaker to 1.4110 in New York. A gauge of technical analysis from Morgan Stanley said that the Dollar's fair value against the Euro strengthened to $1.18. "This reinforces our conviction that the euro-dollar will not see new all time highs going forward. The move is by far the biggest of our median fair value metric for this cross in a single quarter."

The Federal Reserve Chairman Ben Bernanke gives his semi-annual testimony to Congress on this week and investors will be assessing his comments for the prospects for an economic recovery, monetary policy and quantitative easing. In the Euro-zone, a number of monthly surveys are expected to convey the message that the worst of the recession is over, with Friday's PMI data forecast to show a continuation of the gradual recovery from the 2008 lows.

Today's Economic Data 20th July

U.K 00:01 Rightmove House Prices (July)

U.S 15:00 Leading Indicators (June)

17 July 2009

The Pound encounters strong resistance against the Euro and the Dollar as concerns over the UK debt position increase

GBPEUR/GBPUSD

The Pound declined against the Dollar yesterday, snapping a three day rally, and UK two-year gilts rose for the first time in three days, as investors sought the security of government debt on concerns that the crisis in the world's banking industry has further to run. The yield spread between two and 10-year securities widened to the most in a month, after the U.S commercial lender CIT Group Inc said that it probably won't receive a federal bailout, fueling speculation that it will file for bankruptcy.

The UK currency maintained a generally steady tone in London as it remained resilient, but was unable to make any strong headway, encountering strong resistance around 1.1650 versus the Euro and $1.6400 against the U.S Dollar. The International Monetary Fund warned that the UK government may need to take further action to stabilise the financial sector, which undermined confidence to some extent.

The IMF also reported that the Prime Minister Gordon Brown risks putting pressure on the Pound unless he produces a "credible plan" to curb Britain's budget deficit. In its annual assessment, the IMF said in a statement that "the success of the current policy packages hinges on the trust of the public in the solvency of the government."

The Fund predicts that UK debt may double to almost 100% of UK gross domestic product in the next five years, a level that Standard & Poor's said in May was incompatible with Britain's top AAA credit rating. Brown faces the an election within the next year and has resisted talking about spending cuts, saying that the economy needs a boost form government funds.

Concerns over the UK debt position has undermined confidence in financial markets, as stocks plunged over night and weakened the Pound, with an element of risk aversion saturating the the market. The Pound may face a sterner test over the coming weeks if there is a sharp deterioration in international sentiment and renewed pressure on the banking sector.

The Pound edged back below $1.64 as investors became cautious with no economic releases to guide direction. Henrik Gullberg, a currency strategist at Deutsche Bank AG, said that the Pound's 13% rally against the Dollar this year is "overdone" and it may decline towards its "near-term fair value" of $1.55 in the coming months. "The Pound is overvalued, this doesn't mean that I'm bearish the Pound, but it has moved out of line with everything else around it this year."

A gauge of technical analysis indicates that the Pound will struggle to break the resistance at $1.6450 and a decline below $1.60 will trigger further downward moves towards the $1.54 level. However, in the short-term the UK currency is being supported by the resilience in risk appetite and UK stock advanced for a fourth day yesterday, as earnings at JP Morgan Chase & Co boosted banking shares.

Lloyds Banking Group Plc led a measure of bank shares to a one-month high, after JP Morgan posted a 36% increase in second quarter profit. The benchmark FTSE 100 Index added 0.4% on the day and is heading for the best weekly performance since March. The FTSE 100 has rallied 5.7% since July 10th, after companies including Goldman Sachs Group Inc reported earnings that beat 'analysts' estimates.

EUR/USD

The Euro dipped to lows near $1.4050 in European trading on Thursday, but the Dollar was unable to make any further headway and retained a generally weaker tone through the course of the day. There were no major Euro-zone economic developments to guide markets, while rising European equity markets have eased structural fears for the time being.

U.S economic data was mixed and did not have a decisive impact on the market, with the Dollar unable to benefit from a slightly more cautious tone. The number of Americans filing claims for jobless benefits fell last week to the lowest level since January. Initial claims dropped by 47,000 to 522,000, which was slightly lower than forecasts.

There was a high degree of distortion in the unemployment figures from the auto sector, as seasonal layoffs were lower than usual due in part to the number of job cuts already announced. Elsewhere, the Philadelphia Fed manufacturing index weakened to -7.5 for July, from -2.2 the previous month, as optimism over future business conditions deteriorated despite the orders component rising to a 10-month high.

Today's Economic Data 17th July

EU 10:00 Foreign Trade Balance (May)

U.S 13:30 Housing Starts (June)

- Permits

U.S 18:00 NAHB Housing Index (July)

16 July 2009

The Pound advanced against the Dollar as global risk appetite continued to improve

GBPEUR/GBPUSD

The Pound held firm in European trading on Wednesday and gained significant support during the day from the underlying improvement in global risk appetite, as equity markets rallied worldwide. The UK currency rose versus the Dollar, to a high of $1.6439 overnight, while Sterling also held on to recent gains made against the Euro, as reports on employment indicated that the worst of the recession may have passed.

UK unemployment rose by the least amount in a year in June, as jobless benefit claims climbed from May by just 23,800 to 1.56 million, which was still the highest level in 12-years. The report from the Office of National Statistics showed that overall unemployment in the quarter through May increased by 281,000, the most since records began 1971.

The Prime Minister Gordon Brown faces the difficult prospect of trying to contain unemployment, which is expected to result in over 3 million people out of work and claiming benefits by 2010. The government and the Bank of England is trying to pull the economy out of its worst recession in at least fifty years, lest than 12-months before the next general election.

Separate reports yesterday showed that the housing market improved last month and the British Retail Consortium reported that retail sales rose from a year earlier. The Bank of England Deputy Governor Charles Bean said in an interview that the economy is "bumping along the bottom." Amit Kara, an economist at UBS AG said yesterday that "the second quarter contraction won't be as bad as the previous one. The recovery will be there, though I think we should see unemployment increase at least until the middle of next year."

The Pound rallied despite the headline figure of UK unemployment because the claimant count increase on the month was the smallest since May 2008. The overall jobless rate, measured by International Labour Organisation standards, rose to 2.38 million, the most since 1995. The British Chambers of Commerce said last week that unemployment may reach 3.2 million by the middle of next year.

The unemployment rate on the ILO measure was 7.6% and that compares with 9.5% in the U.S and the Euro-zone. Bean evidently believes that the recession is bottoming out but he also told BBC Radio Leeds this week that the economic recovery will be a "long haul" and it's "inevitable" that unemployment will keep increasing. He also confirmed that the government would allow the Bank of England to surpass the £150 billion ceiling for bond purchases and any such measure would undermine confidence in Sterling.

Companies are still planning to shed workers with British Airways Plc confirming yesterday that it will proceed with job and pay cuts for the airline to survive. Corus, Europe's second biggest steelmaker, may shed as many as 366 workers at a factory in Northeastern England. The job market will eventually improve if an economic recovery gathers momentum and the housing market improved last month as more real-estate agents said that prices rose rather than fell.

The prospect of further job losses is keeping wages down, as earnings grew just 2.6%, the least since records began in 2001. Average earnings in the three months through May rose 2.3% from a year earlier. Nevertheless, the Pound climbed to the strongest level in almost two weeks against the U.S Dollar as the FTSE 350 Banks Index advanced for a third straight day.

The underlying improvement in risk appetite saw UK stocks rise yesterday by the most since April, after the unemployment data spurred speculation that the economic slump is easing and encouraged investors back into higher-yielding assets. The benchmark FTSE 100 Index surged 2.6% to 4,346.46, the biggest gain since April 24th.

Investor sentiment in UK stocks dropped decisively in July, as prospects for the global economy worsened. The FTSE 100 has dropped 3.5% from an almost five-month high on June 1st, amid speculation that equities have outpaced the outlook for economic growth, after a three month 28% rally that pushed valuations to the highest level in five years.

Roberto Mialich, a currency strategist at UniCredit Markets and Investment Banking in Milan, said that "sterling is benefiting from the positive news from U.S firms, as this prompts a reversal in risk aversion. The Pound will probably appreciate to $1.73 by the end of the year." Stephen Jen, managing director of macro economic and currencies at BlueGold Capital Management LLP, said that the Pound's 18% decline in the past 12 months has been overdone, and investors should buy it (sterling) to prepare for a "steep" economic recovery."

Rising stocks and a weaker Dollar will be crucial in allowing Sterling to make gains above the so called resistance level at 1.6450. In addition, Adam Cole, global head of foreign-exchange strategy at RBC Capital Markets, wrote in a report yesterday that the Pound is still 20% undervalued against the Euro despite it rising by 11% this year already.

EUR/USD

The Dollar was unable to make any headway in European trading on Wednesday and the Euro pushed higher during the course of the day. An improvement in risk appetite curbed demand for the U.S currency and it dipped towards a one-month low on a trade weighted basis. U.S consumer prices rose 0.7% in June as fuel prices rose sharply over the same period, while there was also a core increase in prices of 0.2%, largely in line with initial forecasts.

Elsewhere, the New York manufacturing index strengthened in July to the strongest reading since October and offered some degree of support. The decline in industrial output also slowed to 0.4% in June, from a revised 1.2% previously, where there was a small decline in capacity use to 68% from 68.2%. The Philadelphia Fed survey will be watch closely this afternoon for any confirmation of an improvement in manufacturing conditions.

The combination of data releases and corporate earnings may help to support risk appetite in the near-term and the Euro pushed to highs above the $1.4100 level, although the improvement in confidence is still liable to remain fragile. The Federal Reserve minutes from the June policy meeting revealed some increase in medium-term inflationary fears. The Fed also raised its 2009 GDP forecasts, although the unemployment forecasts were also increased.

Today's Economic Data 16th July

U.S 13:30 Initial Jobless Claims (w/e 10th July)

U.S 14:00 TICs Capital Inflows (May)

U.S 15:00 Philly Fed Business Survey (July)

15 July 2009

The Pound rebounds against the majors amid an improvement in risk appetite