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Daily News from Senior FX Analyst – Samuel Allen

Sterling fell against the euro on Tuesday as the single currency was bolstered by solid demand in the Irish and Greek bond market, the pound was about the only currency that actually managed to drop against the Dollar as renewed risk appetite in the markets saw traders buying higher yielding and riskier currencies. The Australian dollar gained 1%, Canadian dollar over 1%, even the beleaguered Euro managed a slight rise but the pound dropped just over half a percent to rest at support just above 1.5500 GBP/USD.

This lackluster performance could be partly attributed to comments made by  BoE Governor Mervyn King where he reaffirmed his view that high inflation was driven by temporary factors, “As we already knew, inflation is starting to trend lower although it remains high for now,” said Tom Levinson, currency strategist at ING, “but the data isn’t likely to change the BoE’s dovish stance,” this dovish stance coupled with their positive rhetoric concerning additional quantitative easing has encouraged traders to sell their Sterling positions.

One of the currencies that has benefitted from this combination of renewed risk appetite and a fall in sterling confidence is the Australian Dollar. Sterling suffered a 1.5% exchange rate loss during the day, breaking below a support level which has held for just over a month now (1.7262) this could signal that the exchange rate might drop further in the lead up to the Australian election at the end of this week. We could even see the rate of exchange drop to around 1.6400 support in the medium term.

Looking forward to today, we have the release of the Bank of England’s minutes from their last meeting. Given that price pressures are starting to slow, few analysts expect that BoE policymakers share the views of arch-hawk Andrew Sentance, who has been consistently voting to raise rates. Some analysts noted a possibility that more policy accommodation may have been discussed this month along with potentially more quantitative easing.

“The BoE minutes are likely to be on the dovish side with some market speculation that quantitative easing was discussed or even voted for by some members of the MPC,” analysts at BNP Paribas said, adding that this may put sterling under selling pressure.

Crude oil is generally a good gauge of the global economy, as demand profiles rise along with its value. Prices for crude oil rose from a 5 week low yesterday bolstered by confidence that the economic recovery will be sustained, increasing fuel demand.

“We’ve got higher equities and a lower dollar supporting the market,” said Peter Beutel president of trading advisory company Cameron Hanover Inc, “Rising equities are a sign the economy could be expanding, leading to increased demand. The fall of the dollar makes dollar-denominated crude cheaper for many buyers.”

During the day the S&P 500 climbed 1.4 percent to 1,094.95, and the Dow Jones Industrial Average advanced 1.2 percent to 10,427.95, the FTSE closed up 1.33%, Dax + 1.59%, CAC + 1.81% and Gold hovered around 1225. All these moves are typical of a return to risk appetite.

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