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GBP improves vs USD amidst a return of confidence

GBP improves vs USD amidst a return of confidence

On the eve of the 2010 World Cup, there are a number of ongoing developments and events that have given markets much to ponder before everyone turns their collective swivel seats away from their desks and towards the televisions. The spectre of some supportive Chinese data over the latter half of this week has been sufficient to turn the broader market around to one where risk is creeping back with equities tentatively pushing higher, bond yields up and commodity markets also back into positive territory. Sovereign spreads have tightened while in the FX market the USD is lower and risk currencies have inched higher. Testifying before the US House overnight, Fed Reserve Chairman Bernanke noted that the economy appears on track to continue its expansion through this year and next, supported by expansionary monetary policy and financial sector repair. While fiscal support would wane, data suggested that private final demand will sustain the recovery. He described the recovery as at a moderate pace.

A fresh wave of short covering has helped lift the euro back through the $1.20 level against the dollar, with a modest recovery also seen against sterling and the yen. Comments from the head of China’s national pension fund that the single currency would weather the current sovereign debt crisis also helped lift sentiment. For Sterling, this leaves the euro at 1.2130, and the dollar at 1.4580 currently. The FTSE has opened 1% lower today, though much of this can be attirbuted to BP, which initially opened 11% down before stabilising as the economic and political fallout from the Gulf of Mexico incident gathers yet more pace.

European monetary policy will be the focus of attention today with the ECB and Bank of England due to make policy announcements. Neither are expected to alter rates, with the anaemic eurozone recovery seeing the ECB maintain its dovish stance. There will, as always, though be plenty of interest in the post meeting press conference, which see the Bank outline its latest growth and inflation forecasts. The main focus, however, is likely to be the sovereign debt issue and the ECB’s recent u-turn in terms of bond purchases. Markets will also be looking to any comments on the recent fall in the euro, with the currency down well over 2% on a trade weighed basis since the May policy meeting. In the case of the BoE, the latest economic data are unlikely to result in any changes to the central bank’s judgment of the medium term outlook for growth and inflation.

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