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Pounds Slumps On Retail Sales Data

Sterling rose against the dollar and recovered from a seven-week low versus the euro yesterday as a rise in UK jobless claims fizzled out and the market focused on an increase in the overall employment level.

Bank of England’s Governor Mervyn King gave no hints that more quantitative easing was coming soon in his speech to the TUC, he offered a chance for investors who have been short on the pound to trim those positions.

Technically the pound is looking like it might even regain the 1.600 GBP/USD in the medium term after a drop to the 38% retracement level. The move might even go into extension above that which would mean 1.7500 GBP/USD in the medium term just as long as the global recovery is assured and risk appetite continues to increase.

The yen tumbled against the dollar on yesterday after Japan began heavily selling its currency in foreign exchange markets, while uncertainty about economic growth kept stocks flat.

China’s yuan jumped against the dollar too as U.S. pressure mounts again over the yuan’s value.

Prices of short-dated U.S. Treasuries rose as traders anticipated the Bank of Japan may soon buy U.S. debt to park dollars coming in from its first intervention in more than six years. The intervention and weak U.S. manufacturing data weighed on world stocks.

Commodity prices have started to fall away and some commodity currencies have also started to suffer. Mining stocks have dragged the FTSE index down

“At current levels, the FTSE has already troughed. While the picture going forward is still very unclear, I do not think any downside will push us below 4,800 seen in July,” said Jimmy Yates, head of equities at CMC markets, he also forecasted that the FTSE would be around the 5,675 level by mid-2011.

This can only help to bolster the pounds value against most of the major currency pairs into the medium term. The FTSE has risen faster than both of the major American markets. London’s blue chips have broken out of their two-month trading range, touching four month highs and rising almost 9 percent. Corporate currency transfers have reached a good level on the back of heightened merger and acquisition activity.

The picture is looking relatively good for sterling however the rhetoric coming from certain areas is far from conclusive. “Sterling is on a weaker footing now,” said Lee Hardman at Bank of Tokyo-Mitsubishi UFJ. “There are more clear signs of the UK economy following the U.S. for a sharp slowdown.”

Only time will tell whether Mr Hardman is vindicated or not. Our dollar buyers are placing limits at 1.600 GBP/USD however buyers of the Euro are optimistic at 1.200 GBP/EUR but more and more are taking the market rate right now in the anticipation of lower short term rates of exchange. They are buying any rallies against the Australian Dollar/ Canadian Dollar and Yen. Caution is still very high but business is better than it was and currency transfers are picking up.

Retail sales this morning came in far lower than expected at -0.5% versus the expected figure of +0.3%. Sterling has dropped immediately after this release and might well continue to drop against the stronger Euro. The data doesn’t carry as much weight as previous house price and inflationary data and its impact is likely to be short lived. It does however have an impact on the FTSE which can punch the value of the pound in the gut anytime it likes.

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