Having traded strongly against the dollar in the early session, the euro surrendered gains in the afternoon session, pulling the price down sharply to close a $1.4873.

• Initially, the greenback hit a fresh 14-month low versus the euro after the Beijing-based Financial News revived concern over the status of the dollar, stating that China should raise the amount of yen and euros held in its foreign-exchange reserves.
• However, the dollar pared its losses after the author of the report said that it was purely a “personal view”.
• In addition, the issue of diversification has been a topic for quite a while and the impact of the news was short-lived. Analysts noted that investors were particularly short on the dollar already and were cautious about over-selling.
• In the afternoon, the Chicago Fed announced that its Midwest Manufacturing Index rose 1.0% in September offering more evidence that the US economy is digging itself out of the economic slowdown and lending support to the greenback.
• The single currency lost further value with the US stock markets opening in the red, which in turn pulled European equities negative, discouraging euro investment.

A broadly stronger pound hit a two-week high against the aussie, briefly rising over 1.8000, as confidence in the UK economy gained momentum.

• Sterling jumped following the minutes from the Bank of England’s latest policy meeting, which dampened expectations of an extension to quantitative easing.
• The minutes appeared to move the balance of market expectations to the possibility of a pause of the government’s asset purchase scheme in November, reversing recent speculation.
• In addition, the aussie dollar found its strength undermined as commodity prices, most notably oil, turned lower, discouraging investors from the higher-yielding currency.
• In trading this morning the pound has continued to advance, reaching back over 1.80, as investors cut long positions in the “riskier” currency after Chinese data dashed expectations of some who were betting on a positive surprise.
• The most significant figure, the Chinese 3rd quarter GDP, revealed a growth rate of 8.9%, bang in line with expectations, however there had been hopes of over 9.0%.

The kiwi advanced over three and a half cents (1.6%) against the pound yesterday as investors showed renewed enthusiasm for risky assets.

• Rising commodity-prices and stronger-than-expected corporate earnings in the US have contributed to continued demand for higher-yielding currencies.
• In addition, investors are now pricing in that New Zealand’s central bank is likely to drop its monetary- easing bias at its meeting next week as economic data point to improvement.
• Although there has been speculation that the RBNZ has expressed concern that the strength of the kiwi is frustrating economic recovery, strong data has investors questioning whether the central bank can keep interest rates on hold until the middle of next year.
• In trading this morning, the New Zealand dollar has capped its gains, with the price currently hovering just above 2.17.

Sterling achieved a three-week high of 1.6297 against the dollar yesterday, supported by upbeat comments about the UK economy.

• The pound jumped nearly three cents, or 1.8%, against the dollar on speculation that policy makers will pause their asset-purchase programme next month as the economy shows signs of recovering from the recession.
• The Financial Times cited Bank of England Markets Director Paul Fisher as saying that the asset purchases scheme may be paused to give the central bank the option “of doing more later.”
• Analysts suggested that it appeared that the Bank of England was letting it be known in more forceful terms that it is not talking the pound down any longer.
• Additionally, the pound benefited from broad dollar weakness as optimism about the global economy and buoyant earnings from Goldman Sachs and Citigroup encouraged investors to move into currencies seen as being higher risk.
• Data also revealed that US jobless claims dropped by another 10K week-on-week, and that the inflation figure increased to 0.2%, both of which beat market expectations, lessening demand for the haven currency.

Sterling made strong gains in early trading yesterday following better-than-expected employment data, but the price pulled back to close up 0.4% at $1.5980.

• The number of UK jobless claiming unemployment benefit rose by 20.8K in September, less than the forecast figure of 25.1K, and the smallest rise since May 2008, enabling the pound to post an intra-week high of $1.6022.
• The greenback also suffered from comments made on Tuesday evening from Fed Vice Chairman Donald Kohn, which supported speculation that the dollar downtrend will be broad and continuous for some time to come.
• However, the dollar trimmed its losses in the afternoon following a drop in sales figures. Due largely to the end of the cash-for-clunkers programme, retail figures in the US fell by 1.5% in August, having risen by a revised 2.2% in August.
• The dollar has come under heavy pressure in trading this morning after the Federal Open Market Committee minutes, released late last night, confirmed speculation that US interest rates would be kept at near zero for an extended period.
• Sterling has gained over a cent, or 0.8%, so far today, with the price currently hovering just above 1.61.

The pound relinquished early gains against the single currency, closing marginally down at 1.0704 as rising risk appetite benefited the euro.

• Sterling initially rose against the single currency yesterday after data showed a smaller than expected rise in the number of UK jobless claiming benefits, and the overall unemployment rate unexpectedly held at 7.9%.
• This data prompted investors to further pare back some of the heavy bets built up against sterling in recent weeks, which have pushed the price to multi-month lows.
• In addition, some analysts have said that speculation over an extension of quantitative easing could be overdone, and that the pound / euro price could have correction potential.
• However, the market remained broadly bearish on sterling because of Britain’s deteriorating fiscal position and the likelihood that rates will remain at 0.5% for a long period.
• In afternoon trading, the euro clawed back its losses, supported by a significant rise in global equities, which buoyed demand for the broadly stronger single currency.
• The pound has reversed its down trend this morning, benefiting from the word so of a BoE policymaker who said that quantitative easing was now working.

The pound reversed its three-day slide against the euro as a surprise dip in a German economic sentiment index offset weak UK inflation data.

• In early trading, sterling was undermined by a declining inflation rate, which prompted further speculation that interest rates could be on hold at 0.5% until 2011 and sent the UK currency to a six-month low of 1.0628.
• The Consumer Prices Index (CPI) dropped to an annual rate of 1.1% in September from 1.6% in August. Meanwhile, the Retail Prices Index (RPI) inflation measure, which includes mortgage interest payments and housing costs, fell, to -1.4% from -1.3%.
• However, the pound rebounded strongly after the “positive signs” in the eurozone began to fade, with the German ZEW measure of investor sentiment unexpectedly falling after three months of gains.
• Additionally, the pound was given slight support in the afternoon after the BoE Deputy Governor spoke more positively about the UK recovery, subduing rising concerns over the health of the economy.
• Investors took the opportunity to lock in profits, allowing the pound to rally up from session lows to close up at 1.0718.

The single currency recovered some of the losses it incurred on Friday, gaining over half a cent against the greenback as risk appetite in the market strengthened.

• Rallying equities yesterday, which have been boosted by stronger commodity prices and optimism about the US corporate earnings season, also buoyed support for the euro, allowing it to briefly trade over 1.48.
• Analysts also noted that while in other nations future policy remains hazy, the single currency benefited from a clearer outlook for monetary policy in the eurozone.
• Additionally, comments from the president of the St Louis Federal Reserve that the US economy faced risks from rising inflation, stoked speculation that US interest rates might rise sooner than had been expected, but investors remained bold in their exposure to risk, continuing to sell the dollar.
• This morning, the pairing is trading relatively steadily around yesterday’s closing price, although the euro is likely to find support from a German economic sentiment survey, released today at 10:00BST.
• In the US, investors await figures on the Federal Budget Balance, however the exact time of the release is unknown.

The euro relinquished some of its recent gains against the greenback yesterday, with investors on the defensive ahead of the ECB rate decision today.

• A broadly stronger dollar was the currency of choice yesterday as investors trimmed “riskier” positions in favour of the haven currency as equities slipped into the red, easing risk appetite.
• The dollar also benefited after a US official said raising interest rates would not derail the US economic recovery. “Even if we were to start immediately, much time would pass before incremental increases could be considered tight or even neutral policy.
• Additionally analysts noted that the greenback was being supported by speculation that the dollar’s decline may have been too fast to sustain.
• In trading this morning, the greenback has come under pressure after Australian employment data reinforced demand for higher-yielding assets.
• The ECB are widely expected to announce today at 12:45BST that interest rates in the eurozone will remain at a record low of 1.0%, though the tone of the accompanying statement is likely to reflect growing optimism over the state of economic recovery in the region.

The kiwi dollar posted a 2.1% gain, a movement of four and half cents, against the pound yesterday in the wake of a strong business confidence survey.

• During European trading hours the kiwi gained steadily, supported by speculation that Australia would raise their interest rate level.
• The kiwi was also buoyed by rising risk appetite as global stocks held up despite a weak US employment report on Friday.
• In late evening though, the kiwi received a solid boost after the respected NZIER survey revealed the first optimistic figure since the fourth quarter of 2006, triggering investor demand for the New Zealand currency.
• In trading this morning the kiwi has continued to gain following the decision of the RBA to move their interest rates up to 3.25%, with the sterling/NZD price nearing a 20-year low.
• However, the kiwi has trimmed its gains, currently trading just 0.1% up on the day, as New Zealand officials highlight the difference between their economy and their neighbour’s.

The pound continued to edge downward, undermined by speculation ahead of the MPC meeting later this week.

• Data revealed that Britain’s services sector grew more strongly than expected in September, expanding at its fastest rate for two years, quelling fears over the UK recovery following weak PMI data in the manufacturing and construction industries last week.
• However, the data failed to buoy confidence in the pound significantly with investors remaining wary of taking positions in UK assets ahead of the MPC statement this week.
• Additionally, business activity in the US non-manufacturing sector expanded in September, against market expectations of standstill, which supported dollar buying.
• The equity markets also rallied from lows at the end of last week, as confidence returned to the markets, however this was of little benefit to a burdened pound, with the pair closing relatively unchanged at 1.5934.
• The US currency has come under pressure this morning however, following speculation that the dollar may be dropped as the currency used in oil trades in the Gulf States, allowing the pound to make hesitant gains.

Sterling relinquished gains against the kiwi dollar on Friday, as concerns mounted over the strength of the global recovery, with the price closing the week at 2.2269.

• Following the release of worse-than-expected jobs data in the US, risk adverse investors bought into dollar and yen havens on Friday, weakening the higher-yielding, ‘risky’ assets.
• However, the kiwi rebounded strongly in afternoon trading, as investors turned bearish in their sentiment towards the US recovery.
• The weak employment data added to concerns that the US recovery is struggling to take hold, and, after an initially flurry of dollar buying, many investors opted against the relative ‘safety’ of US assets.
• In trading this morning, the price has dropped back below 2.22 as the New Zealand currency tracked the strength of its aussie counterpart.
• Heightened speculation of an imminent rate rise in Australia has supported higher-yielding currencies this morning, and the kiwi could find further support as investors await expectations of improved New Zealand business confidence in a survey released today at 22:00BST.

The pound rebounded strongly yesterday, gaining over two cents, or 1.3%, as a sharp rise in risk aversion in the market, dulled demand for the ‘riskier’ currency.

• Both unemployment claims in the US and manufacturing data posted worse-than-expected figures, raising slight concerns over the rate of recovery in the world’s largest economy, and weakening demand for the higher yielding aussie.
• The negative US data was reflected in global stocks, which also took a steep downturn, with major indices loosing around two percent, which further reduced dollar selling, enabling the GBP/AUD price to rise.
• Analysts also noted that the aussie fell prey to light profit taking with investors concerned over speculation that countries are unhappy with the current weakness in the dollar.
• In trading this morning, the pound has edged down around 0.2% as investors avoid taking any long positions ahead of important US employment data later this afternoon.

A broadly stronger pound eventually relinquished its gains against the dollar yesterday, to close the day down 0.15% at $1.5955.

• The British currency initially edged higher after the IMF said that UK gross domestic product will expand 0.9 percent next year, from a July prediction of 0.2 percent, as the housing market slump eases and exports increase.
• However, the pound fell back in the afternoon, weighed down on speculation that money authorities would express some form of support for the US currency at the G7 meeting.
• Additionally data showed that the UK manufacturing PMI unexpectedly fell in September for the second consecutive month, which hampered sterling’s progress.
• In the US, both unemployment claims and manufacturing data posted below forecasts, which eased risk appetite and pulled the pound back below the 1.60 resistance level.
• The dollar is trading higher today as investors take up defensive positions as they await US non-farm employment data released at 13:30BST, which will give the market short-term direction.

The euro pushed higher against the dollar yesterday in choppy trading, even as disappointing US economic data weakened stocks.

• The single currency made strong gains yesterday morning, supported by the results of the ECB cash tender offer.
• The volume of bids was lower than expected, which implied that financial conditions in the eurozone were improving and there may be less need for the ECB to inject money into the market.
• Additionally, German unemployment fell again in September and even after seasonal adjustments, the number of jobless fell by 12,000, resulting in an overall dip in the unemployment rate to 8.2%, which buoyed demand for the single currency.
• In the afternoon however, the single currency trimmed its gains as investors checked their risk activities following a worse-than-expected change in ADP non-farm employment in the US.
• There was also negative manufacturing data from the Chicago area, although analysts noted that data from this region has been volatile and generally erratic recently, which prevented the dollar from garnering too much support.

The British currency, unable to capitalise on strong early gains, lost ground against the euro yesterday, as an easing of risk appetite wore heavily on the fragile pound.

• Initially, sterling extended Tuesday’s rebound following a surprising jump in UK consumer sentiment, posting its biggest monthly boost in more than 14 years and signalling growing optimism about the UK economy.
• Additionally, the pound found support from signals that the Bank of England may not cut its bank reserves deposit rate anytime soon.
• In the afternoon however the pound gave up its gains, as weak US data brushed off on equity markets and sent the pound back down to a close of 1.0915.
• In trading this morning though, the single currency has slipped back on speculation that finance ministers and central bankers will discuss the euro’s strength at a G7 meeting later this week.
• Manufacturing data is due in the UK today at 09:30, with forecasts predicting a return to expansion in the industry, which may offer the pound some support.

Evidence that the UK economic recovery is strengthening enabled sterling to reverse a five day slide against the kiwi, closing up at 2.2341.

• Sterling clawed back nearly two cents, or 0.8%, in the wake of strong data referring to retails sales, credit lending, and a final upward revision to the GDP figure.
• Sales volumes at UK retailers bounced back to their strongest level for five months in September, reaching levels well above expectations, whilst the second quarter GDP figure in the UK was revised to just a 0.6% contraction.
• The positive data was offset slightly by a weaker-than-expected UK current account deficit, but investors seemingly overlooked this, with demand for the pound broadly rising.
• In trading this morning however, the kiwi has advanced, supported by a survey showing business confidence in New Zealand at a ten-year high, which fed speculation of a rise in rates.
• The kiwi also benefitted from a sluggish dollar and strength in the aussie, which supported appetite for riskier assets.

Sterling slid for the third consecutive day against the Australian currency yesterday as the pressure of recent events and statements continued to weigh heavily.

• The aussie pushed higher, gaining another 0.9%, as the pound failed to shrug off comments made last week that a weak currency was in keeping with the BoE’s policy.
• The aussie dollar was also supported from a rise in commodity prices, particularly gold, which rallied back above $1000 per ounce yesterday.
• Additionally, risk sentiment among investors returned as stocks in Europe and the US traded strongly, buoying demand for riskier assets.
• In trading this morning the aussie has continued to advance, supported by renewed talk that the Reserve Bank of Australia would start raising rates in November.
• The speculation came after a central bank watcher said the RBA was almost certain to hike rates by 25 basis points in both November and December, which would make the Australian currency an even more attractive bet for investors searching for bigger returns.

Sterling fell yet further on Friday on perceptions that the UK currency would be allowed to weaken to help the fragile British economy.

• The pound dropped to a fresh five-month low against the euro on Friday as traders continued to sell sterling following comments from Mervyn King that sterling’s fall was helpful in rebalancing the UK economy.
• Some analysts have suggested that these comments which have undermined the UK currency, have become a new policy tool with which the central bank can kick-start the economy.
• Pressure on the pound was also stemming from the UK’s budget deficit and continued speculation that the BoE might yet loosen monetary policy further.
• In trading this morning, slight profit taking has seen the pound cap its losses, with the pair currently trading around 0.15% up for the day.
• Market players say that the outlook for sterling does remain bearish though, and it is set to remain the weakest of the major currencies for some time.

US Dollar: Optimistic Economic Outlooks to Meet Hard Facts This Week

Fundamental Outlook for US Dollar: Bullish

- The Federal Reserve left rates unchanged, but signaled a more optimistic outlook
- University of Michigan consumer confidence jumped to a 21-month high in September
- US durable goods orders tumbled 2.4% in August, marking the steepest drop since January

The US dollar ended the past week marginally higher after the Federal Reserve issued a more optimistic outlook on the economy. In the coming week, though, there will be a variety of growth indicators on hand that may help to signal whether the US recession really ended in Q2. That said, the US dollar index will have to contend with resistance just above 77.00 at the start of the week, but a break above there will likely coincide with a EURUSD drop below 1.4615.

Looking to the upcoming event risk, on Tuesday, the September reading of the Conference Board’s measure of US consumer confidence is expected to rise up to a one-year high of 57 from 54.1 in August, but overall, there are some upside risks for this report. Indeed, the final reading of the University of Michigan’s consumer confidence index show that sentiment improved greatly in September, with the index hitting a 21-month high of 73.5 from 65.7.

On Wednesday, the third round of US Q2 GDP estimates is due to hit the wires, but the results will only be market-moving if we see surprising revisions. The final reading is forecasted to be revised down to -1.2 percent from -1.0 percent, though this would still represent a sharp improvement from Q1, when GDP plunged 6.4 percent. Readings in line with expectations may not have a very big impact on price action, but better-than-anticipated results could lead carry trades higher, especially in light of speculation that the recession may have ended in Q2.

On Thursday, the ISM manufacturing index is projected to rise for the ninth straight month in September to 54 from 52.9, which would be the highest reading since April 2006. With 50 being the point of neutrality, this would also be the second month that the index signals an expansion in activity, adding to evidence that the sector is experiencing a recovery in business activity. The last release didn’t have much of an impact on the US dollar, as risk aversion dominated the day, leading the currency higher. However, the report will still be useful because of its employment component as a leading indicator for the big news on Friday: US non-farm payrolls.

The US non-farm payrolls (NFPs) index is forecasted to show job losses for the 21st straight month in September, though the rate of decline is anticipated to slow further. At the time of writing, Bloomberg News was calling for NFPs to decline by 187,000, which would be the smallest drop since August 2008. Meanwhile, the unemployment rate is projected to edge up to 9.8 percent from 9.7 percent, but ultimately, the NFP result will be the event to watch as it is extremely volatile and is one of the sole reports that impacts the US dollar from a pure fundamental point of view. A better-than-anticipated result is likely to provide a boost to the US dollar, but it will be interesting to see the impact of disappointing results as weak US data tends to weigh on risky assets and push the greenback higher amidst flight-to-quality.

Euro Shows Early Signs of Reversal – Week Ahead Critical to Trends

Fundamental Forecast for Euro: Neutral

- Euro breaks key technical short-term trendline
- Candlesticks likewise point to a potential Euro reversal
- German IFO improves for sixth month
- Risk trends remain most important EURUSD driver

The Euro showed early signs of technical reversal through an eventful week of trading, setting fresh yearly peaks versus the US Dollar yet finishing lower through Friday’s close. Strong rallies in the US S&P 500 and other key risk barometers led the single currency to impressive highs against most major counterparts. Yet a late-week breakdown in risk sentiment sparked a flight to safety across forex markets—much to the Euro’s detriment. Near-term Euro forecasts will very much depend on the trajectory of said asset classes, and a busy global economic calendar promises no shortage of volatility through the week ahead.

The Euro remains in fairly well-defined 6-month uptrend, and we would hardly argue that several days of declines signal that it has set a major top. Yet it is undeniable that the EUR/USD lost much of its short-term momentum—having broken below short-term technical support and threatening further declines. Fundamentals will likely play a fairly significant role in the days ahead as the combination of German and US Employment figures will shed a great deal of light on economic conditions in both key countries. The reports may confirm recent waves of economic optimism or cut celebrations short. Reasonably steady improvements in fundamental data have made for lofty market forecasts across most economic releases, and a string of disappointments could easily force noteworthy corrections across major financial markets.

Early-week German Consumer Price Index numbers and Euro Zone Consumer Confidence figures could produce surprises, but most traders look forward to market-moving German Unemployment Change figures due Wednesday. Previous results showed unemployment actually fell for the second consecutive month through August, but the numbers were clouded by government stimulus payments inducing firms to keep workers on their payrolls. Forecasts for September results call for a far less sanguine 20k jump in unemployment. Given that Germany is largely considered the bellwether for the broader Euro Zone economy, any disappointments could led to a noteworthy correction in the Euro exchange rate.

Friday’s US Nonfarm payrolls result could likewise have a pronounced effect on Euro pairs. US and European markets have proven especially sensitive to major surprises in the monthly payrolls number. Consensus forecasts call for the eighth-consecutive improvement in the jobs release, and any disappointments could clearly make a dent in broader forecasts for growth out of the world’s largest economy.

The critical question remains whether we can expect further equity market gains. Much like the Euro, the S&P 500 showed early signs of reversal through late-week trade. A continuation of said tumbles could easily force the Euro to move in kind.

Japanese Yen Momentum a Combination of Risk, Intervention and Data

Fundamental Forecast for Japanese Yen: Bullish

- Finance Minister Fujji reiterates his opposition to FX intervention
- Policy officials start reining in the stimulus that has supported the most aggressive rally in decades
- Exports shrink 36 percent in the year through August, exacerbated by sharp appreciation of the yen

The Japanese yen was the biggest mover and gainer amongst the majors this past week – by a long shot. However, we can’t idly attribute this appreciation to risk appetite alone. Indeed, we can see while other risk sensitive assets (equities, bonds funds, commodities, high-yield currencies) have pulled back over the same period; they certainly didn’t do so with the same gusto as the yen. Underlying sentiment no doubt prompted the trend; but early signs of policy withdrawal and confirmation from the new Japanese Finance Minister suggesting the days of FX intervention has passed provided the fuel for momentum. Will the market maintain its bearing and pace? That will depend on three dominant factors: interpretation of the G-20 commitments; weighing the fair value of the yen; and the outlook for the domestic recovery.

While the first concern is related to the G-20 meeting and commitments that were announced this past week, the fundamental relation to the yen is risk appetite. In the six-month rally from anything and everything that can bear a yield above the risk-free assets that traders took shelter in during the worst of the crisis, we have seen an early upsurge in demand for return and an elemental redistribution of capital. There have certainly been earlier adopters to the market reversal and those lured in by the steady capital gains; but most of the inflow of wealth is simply coming from the market sidelines and is seeking an investment with stability and steady returns. It wouldn’t take much to spark fear of a reversal and catalyze a wave of profit taking; but it is the money that is flowing back in for the long haul that will decide the larger trend. Both these short-term and long-term dynamics can be impacted by the G-20’s joint statement and individual government’s efforts going forward. The impressive recovery in market levels this past year is in large part due to the guarantees, liquidity injections and bailouts by the world’s policy makers. It is unclear whether speculator confidence in the balance of risk and reward will be anywhere as strong as it has been without the government safety net. However, with German and the US cutting down its programs last week while the global call for ‘exit strategies’ grows to a roar; we may well be testing those waters soon.

It is generally true that the majors are free-floating currencies and economics indeed sets exchange rates; but perfection only exists in academic theory. In reality, the Japanese yen has carried the burden for potential intervention from the Bank of Japan for years. As a major export nation, the former DPJ administration considered a ‘weak yen’ policy essential to economic stability. However, regimes have changed and new LDP Finance Minister Fujii has explicitly said that the currency should reflect economics. The first time, the policy makers made this statement the week before last, the yen responded with a sharp appreciation. With a reiteration of the same this past week (despite the yen being at relative highs), the currency moved on to another leg of its rally. How much pressure has been priced in due to intervention fears? Only time will tell. What’s more, how will the economy handle this steady appreciation? Domestic demand has long been lacking for Japan.

And, so we round out the story with more domestic considerations. As the currency appreciations, a critical artery of growth is slowly pinched off. In line with the G-20’s commitment to balance savings, domestic demand and trade; Japan will have to compensate for the potential loss in exports with domestic demand at a critical time for the economy. In the midst of a fragile recovery, we will now low to key economic data due over the coming week to see if Japan can lift itself out of its worst recession on record. The 3Q Tankan surveys, industrial production, employment, household spending, housing activity and inflation will offer a thorough assessment.

British Pound Losing its Risk Appeal as Conditions Deteriorate

Fundamental Forecast for British Pound: Bearish

- BoE Mervyn King says the weak pound “will be helpful” in supporting a feeble recovery
- Upcoming spending cuts and speculation of a cut in the deposit rate means the BoE is running out of options
- The Bank of England minutes show a unanimous vote to keep the bond purchasing program at 175 billion pounds

Some of the major currencies are showing strength against some pairs and weakness against others – a sign of underlying currents like risk appetite. However, the British pound was down across the board this past week, and in dramatic fashion. Prominent breakouts are starting to look the establishment of new trends as the struggling fundamental health of the United Kingdom begins to override the appeal the currency once held as a source for high yields. The next few weeks will be critical in establishing where the pound will head, and more importantly, where it fits in the market.

There is no doubt that risk trends will have an impact on what kind of direction and pace the British currency takes. However, it will likely start to be more of a one sided influence. Should risk tumble in the wake of the G-20 meeting as investors worry the capital markets can’t support their own weight without a government safety net, the pound will likely tumble. There is still a latent build up of risk appetite behind this currency that was fed by the belief that the recovery in the global economy and markets would be exceptionally beneficial for the United Kingdom which is generally considered to be the industrialized nation in the worst shape. As the outlook for a speedy recovery and fades, so too does the picture of London retaking its title of financial center of the world. Yet, what happens should sentiment actually improve? Even then, the pound will likely lag or even fade despite the positive turn.

Over the past weeks and months, it has become blatantly clear that Europe’s second largest economy is struggling to pull itself out of its deep recession; and the time frame for a return to growth is being continuously pushed back. Not only did the 2Q GDP numbers tell us that the slump was more intense than initially though; but we have also seen that policy officials are running out of options to support an orderly recovery. This past week, the minutes seemed to have a positive tilt in that there was a unanimous vote to keep the bond purchasing program at 175 billion pounds (whereas in the previous vote, the was minority dissention headed by Governor Mervyn King for a greater amount). Nonetheless, the central bank kept open the possibility of further expansion of this unorthodox policy. Another step that was speculated to under consideration was a cut to the deposit rate paid to banks that hold their capital with the BoE. This too was written off; but commentary by King and other MPC members continues to stoke speculation that either or both is still a considerable possibility. Without doubt, the central bank is running out of options to jump start the economy. The further the policy authority extends itself without a commensurate response from financial health or economic activity, the more dire the nation’s condition. Considering the government will have to follow through on a serious round of spending cuts in the near future (expected to be the biggest reduction in over three decades), time is certainly working against policy officials.

In the grand scheme of things, economic data is vital at this point; but a meaningful improvement in the outlook will come with time and a wide array of indicators. Nonetheless, there are a slew of indicators to account for next week – and perhaps even a few of them could help jump start optimism. Most prominent, but least likely to surprise, is the final reading of the 2Q GDP numbers. There is rarely a meaningful adjustment in this last recalculation of the data; but the new current account numbers, some spending adjustments or capital investment alterations would be notable. Among the other notable figures, mortgage approvals, net consumer credit and the money supply are important gauges for financial health. The BoE home equity withdrawal figure and PMI factory and construction data is growth focused.

Written by Terri Belkas, David Rodriguez, John Kicklighter, Ilya Spivak, John Rivera and David Song, Currency Analysts
Article Source – Forex Weekly Trading Forecast – 09.28.09