Sterling has hit a one month low against the Dollar today as comments from a Bank of England policymaker that Britain faces the risk of sliding into a double dip recession.
“Weale’s comments were not too surprising, but it helped produce some weakness in sterling given overall dollar strength,” said Steve Barrow, head of G10 currency research at Standard Bank. “At the moment, the doves have the upper hand.”
Sterling extended losses yesterday after it broke under its 200-day moving average at $1.5469. A close below that level would’ve opened the door to more losses but there was a good technical rebound later in the afternoon and Sterling did manage to hold the level. Because of the currency risk averse climate, the pound is still under severe pressure and the next support level is at $1.5322, the 38.2 percent retracement of the pound’s rally from May 20 to early August. Beyond that 1.5120 GBP/USD looks more than likely.
Earlier, a Bank of England policymaker said the UK risked sliding back into recession, adding to broader risk aversion. The comments drove 10-year British government bond yields near record lows and 30-year German Bund yields to all-time lows as investors sought safety. Bond yields move inversely to prices.
Losses against the dollar helped push sterling lower against the euro, which rose more than half a percent to the day’s high of 82.19 pence, pulling away from 81.43 pence hit on Monday, its weakest in nearly eight weeks. This was relatively surprising with the Euro dropping to its lowest level for 6 years against the Yen and also dropping below support against the Dollar.
The Yen is still the big winner so far this week reaching a 15-year high against the dollar and a nine-year peak against the euro on Tuesday as investors and speculators tested the resolve of Japanese authorities to stem the yen’s steady rise.
Kit Juckes of Société Générale said that the low yields on offer in Japan resulted in a weak Yen in the first place. “The yen is under-owned because Japan had by far the lowest interest rates in the world,” he says “but now falling bond yields in America, as well as in most of Europe, have made Japan a less unattractive place for investors to put their money”.
World stocks fell to one-month lows yesterday after negative U.S. housing data added to fears the global economic recovery would reverse.
Pessimism about global growth has grown infectious in recent weeks after lackluster employment and consumer reports. Fears were affirmed yesterday by a report showing U.S. existing house sales dropped far more than expected. Existing US home sales plunged by a massive 27.2 percent in July to levels unseen in more than a decade.
Federal Reserve Bank of Chicago President Charles Evans said he was concerned about the strength of recovery in the U.S., but saw a return to recession as unlikely.
After the housing figures were released yesterday the Euro actually rose half a point against the Dollar which isn’t typical of previous risk aversion trends. Previously the Euro would’ve dropped in value as traders bought the Dollar as a safe haven asset. This break from expected correlations could be a clue that sovereign wealth funds are diversifying away from their previous risk profile and adding a larger percentage of Euros to their stock of reserve currencies.
The scramble for less risky assets has sent the 10-year and 30-year German Bund yields down more than 0.1 percentage point to record lows at 2.18 percent and 2.79 percent respectively.
This morning’s data releases should help to colour the picture with the German IFO survey giving a gauge of business sentiment. The survey is conducted monthly, querying German firms on the current German business climate as well as their expectations for the next six months. As the largest economy in the Euro-zone, Germany is responsible for approximately a quarter of the total Euro-Zone GDP. Consequently, the German IFO is a significant economic health indicator for the Euro-zone as a whole. Positive readings bode well for the economy, suggesting increased consumer spending and economic growth. Conversely, low IFO readings may be indicative of economic slowdown.
This is followed by durable goods order from America at 1.30 GMT. Durable goods orders give a good indication of the state of the consumer market in America and could have an impact of global growth. They are expected to post at 0.5% growth, anything below that figure could impact the markets severely and provide another excuse for traders to stock up on less risk assets.
The Australian Dollar has found support after they reported a 5.2% increase in revenue to $52.80 billion in the year to June 30, from $50.21 billion the previous year.