GBP looking strong
Yesterday was a relatively quiet day in the currency markets with the US holiday meaning volumes were low and currency pairs were trading in narrow ranges.
In economic releases today we have the UK public borrowing figures, which in recent times have had the people at HM Treasury shaking in their boots. Today however could bring some welcome respite – as consensus forecast for January have the UK back in the black by £100 million. Now, please don’t think the coalition have resolved the UK deficit with this month release, as overall this financial year is still expected to be around £145 billion in deficit. The truth is that January is typically a favourable month for tax receipts and the VAT increase will further support this.
Expect the pound to gain support if the figures are better than expected, as it suggests the UK economy is in a stronger position than many thought. As stated previously, the BOE has in part, been reluctant to raise rates out of concern that this may stall the fragile recovery. Any news that suggests the economy is in better health will add to belief that the MPC will have the scope to increase rates gradually – with the market currently expecting three rate hikes by January 2011.
Over the weekend, the euro gained support as markets predicted that rate tightening will happen sooner rather than later – this was after two ECB members gave rather hawkish interviews. Like the UK the mere hint that rates could be raised tends to increase investors’ appetite for that country’s currency, as they seek to acquire assets where they can achieve higher yields.
Across the pond and the US will release consumer confidence, manufacturing and house price data at 2pm GMT. This will provide further insight into the US economic recovery and whether it is continuing its positive momentum in the first quarter of the year. In early morning trading, the dollar had strengthened on risk aversion, stemming from the political crisis sweeping North Africa and the Middle East. GBP/USD was trading lower at 1.6147 and GBP stronger against the euro at 1.1916 – with all eyes firmly on the all important MPC minutes released tomorrow at 9.30GMT.
The news of the earthquake in New Zealand will no doubt cause a bit of a decline in NZD. This is however beside the point; our thoughts are with all of those who have been and continue to be affected by this disaster.