All eyes will be on UK emergency budget Tuesday

• Sterling rallies on increase in risk in financial markets• Dollar trades lower as risk trade re-enters as global equities rise• Euro benefits against dollar in corrective phase• China vows to boost Yuan flexibility, hints at appreciation• All eyes will be on UK emergency budget Tuesday

US Dollar:

The dollar took a turn lower as the risk trade re-entered the market with vengeance. Global stock markets are higher, with China’s decision to make its exchange rate more flexible powering Asian markets ahead. It looks like China is going to slowly appreciate the Yuan and offshore equity markets will probably like that very much. Risk appetite has revived somewhat with signs of stabilization in European and US markets. Wall Street is bracing for a volatile week with a heavy dose of US economic data and a meeting of the Federal Reserve’s policy making body Tues + Weds with no interest rate changes expected. Among the data due this week, the market will grapple with existing homes sales for May, out Tuesday, May New Home Sales a day later, and a final revision of Q1 GDP as well as the final reading for the Reuters/ Uni of Michigan consumer con¬fidence index for June both Friday. No major data.   

As expected, all eyes will be on Tuesday’s emergency UK budget as the coalition government tries to grapple with the UK’s huge debt levels, bringing in predicted cuts in public spending. In the meantime, sterling has had a good start to the week against the dollar as risk appetite increased and the greenback was sold off across the board. Cable gained over a cent to push GBP/USD up towards the $1.49 level. The story regarding China looking to let its currency appreciate against the dollar also led towards a drag on the buck, pushing cable higher. Against the euro there has not been much movement as sideways trading remains for GBP/EUR, with both currencies benefitting from the dollar move. Friday’s data on public sector borrowing may have been good news for the UK Treasury, but wont lessen the need for additional discretionary measures, without which the pace of improvement wont be sufficient to stop debt rising as a percentage of gross domestic product and avoid a downgrade. The public finances are still dire so May’s improved data will not deflect Chancellor George Os¬borne from pressing ahead with his plans to step up the pace of fiscal consolidation in Tuesday’s emergency budget. Lets hope Wednesday’s England football result will make Tuesday's cuts a little easier to swallow. Data overnight showed UK house prices rose in early June but at a slower pace than in recent months, as growing concerns over upcoming tax rises and public spending cuts put people off buying a new house. Data: not a


The single currency traded sideways against sterling towards the end of last week and this has continued into this mornings trade as both currencies benefit from risk re-appearing back into global markets. The euro is higher Monday against the dollar, fuelled by the Chinese announcement on the Yuan. The euro took over half a cent off the greenback as the dollar fell against most major currencies, helping EUR/USD push up towards the $1.2450 level. The recent euro rally seems to be a corrective phase in a bear market and not a change in trend, but the upward momentum is strong and the $1.25 mark may be tested soon. Since the common currency’s rebound is partially a product of market players covering negative bets, it might not portend a sustained im¬provement, analysts said. Investors dramatically scaled back their bets against the euro in the week ended Tuesday, according to a Scotia Bank analysis of the weekly Commitments of Traders report released Friday by the Commodity Futures Trading Commission. Data: Nada, but Portugal and Spain to play in World Cup to¬day. Speakers 15.30: ECB President Trichet.


• Oil prices rallied in Asian trade Monday on expectations of higher demand from Chinese consumers after China’s central bank said it would allow for a more flexible Yuan.

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