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GBP could improve further

GBP could improve further

It is a sign of how tentative the recovery in the markets is that an uncontroversial statement from the head of the US Federal Reserve, in a testimony to Congress, that the US recovery ‘remains unusually uncertain’ can move risk appetite and send the Dollar higher. The reaction follows the tradition of the markets overreacting to central bank comments, which is why the heads of central banks are generally very noncommittal. Of course the uncertain nature of the US recovery should comes as a surprise to no-one, and the factors that make it uncertain, slow growth in Europe, leading nations debt etc, are well known, which maybe why the reaction was relatively muted, and the currency markets have been creeping back to where they were before his testimony. The Euro did dip to 1.2750 against the Dollar, but it is slowly creeping back upwards, and the Pound has followed a similar course.

The Pound’s fall against the Dollar was already in effect before Bernanke’s statement, kick started by yesterday’s BoE minutes, and although it did show the usual 7-1 vote for a rate hike, as expected, it also showed that the committee discussed extending quantitative easing (QE), although once again there was an unanimous vote to keep the current scheme on hold. Previously there was a general expectation that the QE and liquidity measures would start to be withdrawn, but as governments have announced their spending cuts, and growth, although back in positive territory, is anaemic, the extension of these measures is back on the cards. When the first bout of QE was implemented the Pound suffered large falls, so it’s no surprise that even the discussion of further measures weighs on the currency, but with inflation remaining stubbornly high further extending QE could be seen as acting against the banks remit, and is only likely to be used in a worst case scenario.

The Pound has also lost a little ground against the Yen, as the Japanese currency was boosted by comments from the deputy governor of the Bank of Japan (BoJ) that they wouldn’t be seeking to extend their own version of QE to bring down the strong Yen, although they are going to be watching the markets closely. The one thing the BoJ don’t want to do is defend any particular level for the Yen, as this is what cost the UK government so much money in the early 90’s, and only yesterday the central bank of Switzerland announced a 14bn swizz franc loss from their own recent currency interventions.

This morning we had the retail sales figures for the UK, and they are stronger than expected having been given a boost by the World Cup, in spite of England’s poor showing. The figures have given the Pound a small boost, but they will also raise hopes for tomorrow’s GDP figure to come in strong, and that could provide the Pound with a significant lift.

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