UK
The pound rose to a one-week high against the US dollar as the Bank of England kept its asset-buying program and benchmark interest rate unchanged. The BOE kept its QE on hold at £325bn on Thursday, sparking a wave of out-performance in sterling and invalidating speculation that the central bank would take a more dovish stance. The panel led by Governor Mervyn King also decided to hold the key interest rate at 0.50%. The current rate is the lowest since the central bank was established in 1694. Further QE is not out the window for the foreseeable future. The BoE’s most recent monthly inflation report said “the possibility that the substantial challenges within the Eurozone area will lead to significant economic and financial disruption continues to pose the greatest threat to the UK recovery.”
GBPEUR advanced to a high of 1.2398 from morning lows of 1.2298. With a number of clear breaks below the support level of 1.2350 technical indicators suggest a move lower to be possible. Headline risks however remain the key market mover meaning any more negative headlines could see us move back towards GBPEUR 1.25. The pound has advanced 3.3% against the euro in the past three months reaching 1.2577 on May 16, the strongest level since November 2008.
GBPUSD advanced 0.5% to $1.5601, the highest since May 30. While the lack of QE helped, the day high actually came after China surprised the markets by cutting borrowing costs by 25bps in a bid to boost growth. Technical’ s suggest the pair is oversold, look for a close above 1.56 to confirm a short-term corrective bounce into the 1.5600-1.5800 area.
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WORLDWIDE
In late afternoon ratings agency Fitch downgraded Spain’s credit rating to BBB from A with outlook negative. This was closely followed by EU’S Junker comments of “ the Eurozone must integrate more to stem the debt crisis, our region faces crucial days and weeks ahead”.
Meanwhile Spain’s bond auction was oversubscribed yesterday, which means that the country’s fiscal problems have not deterred investors seeking a higher yield.
German Chancellor Angela Merkel said yesterday that there is no quick fix for the Eurozone debt crisis and that it will take years to repair Europe’s monetary union. “It is human to think there could be a single blast to clear the path and then the euro crisis will be over, but I don’t think that will work,”.
China cut interest rates for the first time since 2008. The People’s Bank of China reduced the rate by a quarter point to 6.31%, effective from June 8. The deposit rate was lowered to 3.25% from 3.5%. The decision to cut interest rates by 25 basis points was quite unexpected and revives some hopes of fresh stimulus measures in Europe and the United States.
The Australian and Canadian Dollar benefited most from the Chinese rate cut moving to day, week and month highs against the euro, US dollar and Japanese Yen.
The US economic recovery faces significant risks, including from the European sovereign debt crisis and uncertain US fiscal policy, Federal Reserve Chairman Ben Bernanke said in testimony prepared for a congressional hearing Thursday.
EURUSD rallied to a 10-day high of 1.2625. However, later on in the trading day and following Ben Bernanke’s perceived positive comments the USD regained strength pushing the rate down to 1.2539. As with Cable this pair could well benefit from a corrective bounce. Assuming no negative headlines affect risk appetite (which is a big ask) look for a break of 1.2630 as key resistance.
New claims for unemployment benefits in the US fell slightly more than expected for the week ending June 2, according to figures released yesterday by the Labour Department. New figures put the level of initial jobless claims at 377,000 for the week, on a seasonally adjusted basis, a drop of 12,000 from the previous week’s revised level of 389,000.
