IFX Market Report - 16 November 2009

Sterling recovered some of its losses against the US dollar and the euro on Friday as traders closed short positions in the UK currency ahead of the weekend. The pound pulled back from lows after Bank of England Governor Mervyn King suggested a weak currency would help the UK economy recover. Despite its gains on Friday, analysts said sentiment towards the currency remained negative. 

Traders in London said sterling was also benefiting from some strategic buying from investors keen to acquire UK property and bid for British companies, feeling the weakened pound and low property prices meant these investments were more attractive. However, as these are not speculative currency purchases as soon as the pound goes above $1.65 these will start to dry up

Sentiment towards the pound remained broadly negative after comments on Wednesday by the BoE's King suggested the central bank was leaving the door open to more asset purchases and saw the benefits of a weak currency. The BoE last week opted to expand asset purchases under its quantitative easing programme by a further 25 billion pounds, taking its target to 200 billion pounds.

By 3.15pm, sterling gained 0.4% versus the dollar to $1.6647. Earlier, it touched a session peak of $1.6702, it traded well below a three-month high of $1.6844 hit earlier in the week and is poised to end a volatile week largely unchanged. 

The pound gained 0.3% versus the euro to the day's high of €1.1208. Against the single currency, the pound pulled away from a two-week low of €1.1084 hit on Thursday. 

Analysts expect the pound to stay weak overall on the view that UK interest rates will stay at low levels for longer than those in other countries, but market participants say that its near-term losses may be limited as investors are keen to pick up sterling as it falls towards $1.65. At the same time, traders are expecting demand to sell the pound to emerge if it climbs above $1.68, adding that sterling was likely to remain hemmed between those two levels for now - just as it did all this week. 

Bank of England Minutes 

Attention this week will move to the release of the Bank of England minutes on Wednesday, two weeks after the decision to increase quantitative easing by £25bn, below the consensus of £50bn and to leave interest rates on hold at 0.5%. Investors will be keen to pick up on any hints the central bank may drop that suggest their stance on monetary policy and what they are likely to decide at the December meeting.

Other data out this week includes Retail Sales in the US later today. Tuesday sees the release of CPI and Core CPI figures in the UK followed by Retail Price Index. On Friday M4 Money supply and Retail Sales are published. 

At 9.45am this morning the pound was at $1.6650, €1.1137, 12.33 ZAR, 149.245 JPY, 11.34 SEK and AU$1.7871. The euro sat at $1.4971 against the US Dollar.

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