IFX Market Report

Early yesterday morning, sterling saw gains against the dollar after positive UK manufacturing sector data and mortgage approvals increased optimism that the British economy is improving. Helping the pound further was broad selling of the dollar ahead of key US economic data due later in the week.

The CIPS/Markit purchasing manager's index came in at 54.1 for December, up from 51.8 in November and exceeding forecasts for 52.0. The data showed UK manufacturing activity expanded at its fastest pace in more than two years.

Other data showed that British lenders in November approved the highest number of home mortgages since March 2008, while the Bank of England's preferred gauge of money supply showed a significant increase.

By 2.30pm, sterling traded at $1.6190, having climbed as high as $1.6242 after the data earlier. Later on sterling had fallen to a session low of $1.6060, but recovered after widespread pound buying as London traders returned from the New Year holiday.

The pound didn’t fair so well against the euro, at mid afternoon the euro had gained around 0.6% against the pound, the rate had fallen to a day low of €1.1198 after a European central bank bought enough euros at around €1.1261 to push the rate down. The pound had been as high as €1.1296 earlier in the session, however a 200 day moving average helped the euro against any further losses.

2009 was a difficult year for the pound, but not the worst, many will remember the collapse the pound suffered at the end of 2008. Although the pound in 2009 hit highs around the $1.70 and €1.19 marks, it struggled to maintain momentum and each peak was followed by an equally significant trough. These rapid movements have been down to a variety of reasons ranging from the controversial Quantitative Easing Programme, the MP expenses scandal and a loose lipped monetary policy committee who seemed happy to talk the pound down at every available opportunity. However despite the hurdles the pound finished 10% up against the dollar and 7% up against the euro.

This week we see the Bank of England meet for their monthly interest decision meeting, as has been the case for many months now, consensus is they will leave rates on hold at 0.5%, further quantitative easing will be discussed but it is unlikely there will be any increases as key indicators have been fairly upbeat recently.

On January 26^th the Office of National Statistics will release the first estimate for the 4^th Quarter GDP figures. If these figures show a positive number, the UK will officially have left one of the worst recessions to date and this will undoubtedly have a positive affect on sterling strength. But do cast your minds back to October when the 3^rd Quarter figures were released, almost ever trader and analyst expected a positive reading, but the actual figures told a different story and were significantly worse than expected, causing the pound to plummet.

Whatever the outcome of the GDP figures, the UK finances are in terrible state, recession or no recession. There is still a long way to go before an investor looks around the world and decides the UK and the pound is the best option to earn revenue, until that time the pound will be under pressure from the US which appears to be recovering well and the Eurozone which without the major banking issues never really seemed to be under threat.

Moving on to today, Germany sees the release of employment data, whilst the UK PMI construction is released. Later on we have CPI for the Eurozone and Pending Home Sales and Factory Orders in the US.

At 9.00 this morning the pound was at $1.6059, €1.1130, 11.72 ZAR, 147.575 JPY, 11.33 SEK and AU$1.7574. The euro was at $1.4426 against the US dollar.