British pound sterling caught in FX market stalemate; future direction lies with the EUR and whether the ECB will provide support

Details

Published on Tuesday, 04 September 2012 08:39

Written by Will Peters

Your morning global FX market review with a focus on the performance of the pound sterling.

The pound sterling (Currency:GBP) is holding onto recent levels this morning - we have something of a stalemate in the global FX space ahead of a round of central bank decisions due in the latter half of this first week of September.

The pound euro exchange rate is 0.06 pct lower than at Monday night's closing level, at 9:30 AM in London GBP-EUR is at 1.2610.


The pound dollar exchange rate is 0.08 pct higher at 1.5896.

The pound to Australian dollar exchange rate is also 0.08 pct lower at 1.5497.

The lull on global FX markets is certainly related to the forward-looking focus of investors who are likely to stay pat ahead of a raft of central bank monetary policy decisions.

"The ECB policy meeting scheduled for this Thursday may contain details of Euro support and bond buying alongside the ESM and EFSF bodies, if the peripheral countries request assistance. However, next Wednesday (12th September) sees a key ruling on the legality of the ESM by the German Constitutional Court. Markets have their fingers crossed for a “yes”; this would allow the ESM to buy bonds and would no doubt also be seen as positive for equities. A “no” would potentially be seen as a negative outcome for all," says Andrew Morris, managing director of Signature.

Currency markets in review

"The Pound remained above 1.5850 against the U.S Dollar on Monday and moved steadily higher through the course of the day. There was a stronger-than-expected reading for the manufacturing PMI index with an increase to 49.5 for August, from a revised 45.2 the previous month. Although the figures still showed that the sector contracted again last month, there is a sense of optimism that the decline in July was over-exaggerated. There was, however, a stagnation in orders, although this did represent a monthly improvement," says Adam Solomon at TorFX.

The unexpected rise in output relative to the Euro-zone provided a degree of support for the Pound against the Euro and will also dampen expectations that the Bank of England will move to additional quantitative easing over the next couple of meetings.

The UK currency edged above 1.59 against the U.S Dollar to the highest level in two weeks on a trade weighted basis and a fresh two months high above 1.55 versus the Australian Dollar.

A report over-night showed that the latest BRC retail sales report registered an underlying 0.4% annual decline, which will maintain unease over the consumer spending outlook. 
 
The Euro traded within a narrow range against the U.S Dollar, largely due to the Labour Day market holiday. There was a modest downward revision to the Euro-zone PMI manufacturing index and the minor improvement in the Spanish PMI index was offset by a decline in the Italian index to a ten-month low.

"There are further concerns surrounding the Spanish outlook as Prime Minister Rajoy continued to call on the ECB to take action and lower bond yields," warns Solomon.