There was no further boost to Sterling from the collapse of Prudential’s buy out of AIA (the Asian arm of AIG) yesterday, so it looks like the volatility from the large M&A flow may now be over. The Pound is still left with most of the lift given at the start of the month, although it has fallen back below 1.20 against the Euro. The Single Currency has had some mixed news with Iran’s central bank announcing that they would be moving €45bn of their reserves away from Euro’s into Dollars, whilst at the same time a Reuters poll has shown that they may be alone in this as Brazil, Russia, Japan, and South Korea have no similar plans. The European Union President said that the Euro was not undervalued against the Dollar and was around it’s 10 year average, while the measures taken to restore confidence in the Eurozone will take some time to fully take effect. With no further bad news the Euro has remained roughly range bound against the Dollar, although it is a wide range between 1.2150 – 1.2275.
Although there is still some doubts about the pace of Eurozone growth, the sentiment elsewhere is a bit more positive, and was given a further boost yesterday by some good news out of the US. Pending home sales rose by 6%, while auto sales were also higher, although it is this weeks non farm payrolls which will be the big US event. As it was the data out yesterday was enough to cause a jump in stock prices with the S&P500 jumping 2.6%, and it looks like the European markets are likely to follow higher today. The rise in optimism for the global picture weighed on the Dollar as risk appetite increased, and this has allowed the Pound to rise above 1.47, a level it is hovering around this morning.
The Dollar isn’t the only victim of higher risk appetite, the Japanese Yen is a currency that also rises when fears are high, and it fell yesterday on the back of optimism, although it has also had it’s own domestic factors in it’s demise. Only 9 months ago the ruling party was ejected from power for the first time in 50 years, and the incoming government, headed by Yukio Hatoyama, promised some reforms, not least the removal of the American military base in Okinawa. However the failure to arrange this, along with some recent financial scandals have already led to the resignation of the new Primeminister, and as his replacement is seen as preferring a weaker Yen, the currency has suffered. The Pound is still extremely low against the Yen but it has recovered up to Y136, while even the weaker Dollar has managed to make a push up towards Y93.
As this week started late for the UK and the US, the ADP employment report which is usually released on the Wednesday before the non-farm payrolls, is instead released today, and is expected to provide a further boost to optimism by posting a modest gain. This morning we’ve had the UK PMI data for the service sector, which showed the sector broadly steady in May, a slight disappointment after the Icelandic Volcano depressed the measure last month, and the details provide more disappointment with the new business element of the index falling from last month. The Eurozone figure released earlier actually showed a increase in the pace of growth and for the first time in some time a rise in employment in that sector. The economic releases this morning have taken the Pound down to below 1.1950 against the Euro, although it has stayed steady against the Dollar. If we get some good US figures this afternoon, that may help the Pound make some headway against the Dollar, although it is likely to remain roughly rangebound against the single currency.