IFX Market Report - 18 November 2009

Tuesday morning saw Bank of England policymaker Andrew Sentance support the UK economy and speak of it as being on the way to recovery. This came as we saw annual Consumer Price Index up to 1.5% in October, up from a 5 year low of 1.1% in September. This was on par with consensus, which assists with the BoE’s estimation that the UK will head out of the recession in the 4th quarter.

This rise in CPI increased risk appetite for sterling in the morning session, pulling investors away from the safe haven in the USD, the data release gave investors confidence that the UK may have no further requirement to extend Quantitative Easing, which currently stands at £200bn. Analysts may have seen Sentance’s comments as an indication that the decision may have been ‘split’ in regards to the decision to extend QE the last time around.

An end to further QE for the UK will certainly open the gate, and maybe pave the way to a possible interest rate increase some time in 2010. This speculation alone would help strengthen sterling as it would give an indication to investors of potential future yields, and investors may look at sterling as being ‘cheap’ to buy.

This saw sterling reach $1.6875 USD, a 3 ½ month high since we briefly saw $1.70 at the beginning of August, during the afternoon session sterling reached €1.1317, a 2 month high against the Euro, after this possible alliance.

The Euros weakness has not been helped by Jean Claude Trichet’s speech on Thursday of last week. He mentioned that although the Euro Zone has had 2 consecutive quarters of growth, these may have been down to the aid from the Government stimulus package, rather than a natural economic growth, and therefore the EU growth may not be sustainable without further Government aid.

All eyes will certainly be fixed on the BoE Minutes out at 9.30am, which will show the policymakers voting in relation to the last QE extension, and will give an outline of the State of the UK economy. This data has been seen to cause high volatility in the past.

At 9.00am this morning the pound has retracted slightly from yesterday’s highs ahead of the minutes at $1.6841, €1.1269, 12.48 ZAR, 149.882 JPY, 11.51 SEK and AU$1.8055. The euro maintained it position against the US dollar at $1.4917

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