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GBP shows some signs of recovery versus EUR

GBP shows some signs of recovery versus EUR

BP have just managed to get one PR disaster under control in the Gulf of Mexico, as another pops up with the Americans trying to implicate them in the release of the very resilient Ablesbaset al-Megrahi. America seem intent on pinning all their ills on BP, and this is allowing the previous villains, the banks, some time out of the spotlight, helped along by Goldman Sachs announcing that its net income dropped by 83% in Q2, which is in sharp contrast to the media darling Apple who have posted strong Q2 profits, up 83%. The overall picture from this round of corporate earnings is positive, and has boosted risk appetite, helped along by rumours that the Fed will stop paying interest on excess funds banks hold with them, which should mean that the banks will use that money in the broader markets.

As risk appetite rises so do the perceived higher risk currencies and the Australian Dollar has been the past performing currency over the last few days, boosted more by the news out of China than the US. The batch of economic data released by China last week was received badly in the markets, but this week the Chinese stock market has been rising each day, helped along by the Chinese authorities predicting inflation easing which makes tightening less likely. In contrast to the Chinese situation the latest RBA minutes show that Australian interest rates may well be resuming their upward trajectory. Australian inflation was forecast to come down, but still remain in the upper range of the target period, and if the global economy continues to grow at current levels, Australian rates will rise. The news helped push the AUD up 2% against the USD, although it has stayed steady against the Pound.

We’ve had the release of our own central banks minutes this morning, and once again the vote is 7-1 to keep rates on hold. Andrew Sentance again voted for a rate hike, but there was little evidence that he had managed to sway anyone else to his view point. The minutes showed that the committee actually discussed both tightening and easing strategies, as well as raising their forecast for inflation and downgrading their forecasts for growth. The MPC are worried that stubborn inflation might increase inflation expectations in the future, but are reassured that there is little sign of this at the moment, and the spare capacity in the economy should help bring inflation down. The minutes have knocked the Pound down slightly but it is still near the highs of this week.

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