United States Dollar: Thursday’s theme was “sell dollars first, ask questions after” with figures released from the U.S. Labor Department showing that application for jobless insurance payments rose by 35,000 to 445,000 in first week of the New Year. This figure overshadowed other quite bullish data releases, with PPI coming in at +1.1% and the narrowest trade deficit reading in 10 months. The other prominent theme behind the dollar weakness was investors’ realization that the Fed is seemingly the only central bank in the world unconcerned about inflationary pressures, after the ECB’s inflation concerns caught the market unawares. GBP/USD had a quiet start to the day, moving between 1.5744/68 during Asia. The European open saw the release of U.K. November Industrial Production figures, which showed that manufacturing in November strengthened more than forecast. As expected, the Bank of England Interest Rate Decision came without any surprises, as policy makers left the key interest rate at a record low of 0.5% and its bond-purchase program unchanged at £200 billion. The release of the latest NIESR UK GDP estimate figure coming in lower than previous wasn’t ideal, but with Moody’s noting that U.K. should be able to maintain its AAA credit rating through the governments ambitious program of spending cuts, Thursday turned out to be a mixed bag of U.K. macroeconomic releases. Impetus for a move higher in GBP/USD was to come in wake of the weaker than anticipated U.S. jobless claims figure and the press conference with ECB President Trichet. The move higher in GBP/USD was also consequence of the easing of Euro Zone debt jitters. As London was packing up cable posted a high of 1.5884, its strongest level since December 14, but softened up shortly after as massive EUR/GBP short covering continued to take hold. The end of the U.S. session on Thursday marked the fifth straight day of gains for sterling against the greenback. GBP/USD opens this morning at 1.5850.
– We expect a range today in the GBP/USD rate of 1.5790 to 1.5960
Euro: The main question on investor’s lips prior to the ECB press conference on Thursday surrounded the depth at which President Trichet would acknowledge the debt situation in Portugal and the wider Euro Zone crisis. What actually ended up happening was that the market was caught completely wrong footed when Trichet gave a sudden shift in focus to rising inflationary pressures in the region. On the day this saw all the major euro crosses make moves higher, and enjoyed its strongest rally against the dollar in nearly 3 months. Combined with a less worrisome outlook over the Euro Zone debt crisis after relatively well received bond auctions in Portugal (Wednesday) and Spain and Italy (on the day) we saw some major changes in market positioning – some investors flipping from short to long euro, including a very well known U.S. investment bank. EUR/USD began to rally strong across the board coming into the press conference. The rally gained more momentum after a successful Spanish bond auction – at this point it is almost irrelevant that the buyers were probably mostly China and the ECB. The press conference itself caught markets off guard as President Trichet expressed some concern over inflation, and said that the central bank will “do whatever we have to do” to deliver on price stability. Whilst in reality it is unlikely that the ECB are going to be hiking rates any time soon, the fact there was certainly a more hawkish element to the rhetoric, amidst very real European sovereign debt concerns, was enough for the euro bulls and sent EUR/USD sharply higher, with the 200 day moving average providing only temporary resistance to the massive wave of euro short covering. In a research note, Goldman Sachs flipped from short to long euro, targeting the 1.3700 level, and they certainly weren’t the only ones who will have altered their position. The pair reached a high of 1.3383 before softening up later in the day. Given the upward price action in EUR/USD it was no surprise that GBP/EUR was sold off heavily throughout Thursday and it continued to move lower throughout the day as investors moved to cover their short euro positions as short term sentiment in the 17-nation currency flipped. The low for the day was 1.1848. GBP/EUR opens just above that level this morning at 1.1854.
– We expect a range today in the GBP/EUR rate of 1.1790 to 1.1921
Aussie and Kiwi Dollars: With the market’s attention firmly on the horrendous flooding in Queensland and the potential ill effects it will have on the nation’s economy, the AUD has suffered heavily of late. The most recent Australian employment data came in at weak levels, adding only 2,300 jobs against market expectations of 25,000, though the unemployment rate was shown to have fallen to a 2 year low at 5.0%. Initially AUD/USD fell on the tepid job numbers, but managed to regain its losses after it noted the improving unemployment rate and as London came in there was decent demand for the AUD at the 08:00 GMT fixing. Later in the day, with the “risk on” environment firmly established, weaker than anticipated U.S. data, and gold and other metals rallying AUD/USD was able to push slightly above the parity level, but it wasn’t able to hold the level for long. Thursday saw GBP/AUD continue to be the preferred trade on flood concerns, edging upwards towards the 1.5900 level GBP/NZD was able to rally above the 2.0700 level, in what was another stronger day for sterling against the commodity currencies. GBP/AUD and GBP/NZD open this morning at 1.5880 and 2.0622 respectively.
– We expect a range today in the GBP/AUD rate of 1.5800 to 1.5940
– We expect a range today in the GBP/NZD rate of 2.0580 to 2.0720
