Currency watch: Ups and downs

The rocky road to recovery is still on track, although we have seen a huge amount of conflicting data and rhetoric in the last month-– this is especially relevant when focusing on the UK economy.

 Sterling started June fairly positively and made gains against most major currencies including the euro. Then it had an extremely bad hair day and tumbled on 4 June with revelations that Gordon Brown was set to resign – this did not transpire, as we now know, and has helped sterling find its feet again and get back on track against the euro.

As the month progressed, there was mixed news in the markets; the Organisation for Economic Cooperation and Development (OECD) provided an upbeat assessment for the economy, pointing to a recovery, albeit fragile, for 2010. However the World Bank then predicted that the global economy will contract by 2.9% this year, compared to its previous forecast of a 1.7% decline – confused? This mixed data helped to keep the rate in a tight trading range, as no clear direction could be gleaned.

For the UK, healthy data was released later in the month as UK Gfk consumer confidence data came in at -25, the highest reading in 15 months. In addition, UK Nationwide house price data was penned at 0.9% month on month. The house price data was a nice surprise for sterling as the market was expecting a drop of 0.5% following the 0.4% drop in May – naturally the report is cautious but adds to the sentiment that we are seeing a bottoming out in house price decline. This helped sterling push up to 1.1850 against the euro and it looked primed for a push to the key 1.20 level… well, until GDP data for the UK was released. This confirmed the sharpest contraction of the economy in over 50 years at -2.4% and sent sterling tumbling again.

Sterling finished the month on the back foot but still in a trading range of 1.15-1.1850. However, ECB president Trichet was prudent during the recent Financial Stability Review and his tone indicated a whiff of fear over a further credit crunch within the banking sector. In addition, there have been more reports highlighting dire conditions in the Balkan states – in particular Latvia and Bulgaria. Both nations had their currency pegged to the euro with very negative results as GDP is dropping sharply, unemployment increasing and fiscal deficits rising – the concern is that this could spill over to lending nations such as Greece, Hungary and Italy. The Balkan headache is still thumping and going forward could realise significant downward pressure on the euro. There’s been no direct effect on the markets as yet but it’s definitely an area to watch and could be the catalyst which sees sterling find its feet again and make a push for 1.20 against the euro.

Phil McHugh, corporate dealer, CFX Currencies Direct

www.currenciesdirect.com

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