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Japan Intervenes In Currency Markets

Sterling rose against a broadly weaker dollar on yesterday, aided by stubborn UK inflation data which raised speculation that the Bank of England would hold off from extending quantitative easing in the near term. The pounds value rose after the release but it’s momentum slowed against the Euro almost immediately dropping back to below support and closing just below 1.200 GBP/EUR.

A weak reading of UK house prices highlighted structural weaknesses within the UK economy which, combined with austerity measures, were set to dampen upward pressures on prices and wages in the medium term.

“A weak economic recovery and the headwinds of major fiscal austerity measures should dampen corporate pricing power and limit the likelihood of second-round price effects in the medium to longer term,” said James Knightley, at ING.

The annual rate of consumer price inflation held steady at 3.1 percent, above the Bank of England’s 2 percent target. Forecasts had been for 2.9 percent. The inflation rate in the UK was re-assuring for interest rate hawks.

In other market news the RICS house price survey figure fell to -32 in August from -8 in July, its sharpest one-month fall since June 2004. Housing data has often been a leading indicator for consumer spending.
When Halifax published their data earlier this month prices rose by 0.2% against an expected figure of -0.5%. This is against the previous Nationwide figures which supported the RICS view by showing a definite contraction in prices.

Mixed messages in the housing market can be attributed to different lending criteria. Industry insiders believe that the Halifax has more lax lending requirements than the Nationwide and hence their measure shows an increase. The more respected gauge is the RICS report due to its timely nature and independent source.

“Of the two surveys, we’d certainly read more into the RICS data than the Nationwide and hence we’d look for a weaker pound and stronger gilts and short sterling as a result,” Steve Barrow, currency analyst at Standard Bank.

The pound certainly looks very precarious against the recovering Euro. Corporate clients have taken advantage of the higher rates up to 1.2200 GBP/EUR over the past few weeks with some companies even securing forward contracts well into 2011.

Australian dollar buyers have also started to stock up on forward contracts for the next financial year. The Australian economy is very strong and the high yield appeal allows clients to buy the Australian dollar at a better forward rate than the daily rate due to the higher yield on the Australian dollar. Some clients have benefitted from up to a 2 point advantage from Torfx.

Sterling has been locked in a consolidation pattern against the Dollar for the past few weeks as markets decided whether to continue in the uptrend in place since May’s low of 1.4244 GBP/USD.

The rate has retraced to a 38.2 Fibonacci retracement and today it looked like it might again be on the way back up to the 1.6 level. A close above 1.5600 GBP/USD this week would be very bullish for the pound.

The dollar slid to a 15-year low beneath 83 yen early this week after Japan’s prime minister won a leadership vote which cemented his non-interventionist stance against party heavyweight Ichiro Ozawa, who had been more strident in his calls to intervene to weaken the yen.

This downward move was halted in its tracks this morning where they have intervened to sell Yen for the first time since 2004. Immediately driving the Dollar 3% higher and the Euro/Yen 3% lower.

The euro hit a one-month peak against the beleaguered ‘Greenback’ after piercing a key technical level resistance level at 1.2900 EUR/USD. As risk appetite grows the Dollar will be the first to weaken.

Today’s jobless claims change for August is predicted to show that unemployment slowed to minus 3k from minus 3.8k in July. A higher figure could send sterling back momentarily but as long as the rate hasn’t accelerated too fast it won’t worry the big players who are more interested in yield differentials and GDP.