Pound rallies against majors on hawkish Bank of England inflation report

US Dollar:

Except for sterling (discussed below), foreign exchange majors are trading in relatively tight ranges as some traders looked for cues from the summit of leaders from the Group of 20 nations getting underway in Soul. With foreign exchange issues in the top of the agenda for discussion amid ongoing tensions in currency markets, traders will be watching whether anything substantial will result from the talks. The major topic will be the weakening of the dollar, strongly denied by the US fed that it has done this on purpose, with Fed officials assuring fellow bankers they had “no deliberate intention” to weaken the dollars value. There are two major forces in the FX markets right now, one of them is QE, which has weakened the buck. The other is the euro-zone’s sovereign debt crises which is mounting pressure on the euro. A tug of war between EUR/USD has seen one currency then the other take the baton of the ‘ugly currency’ of the pack and in turn, fall in value. It seems the euro has the baton at present as EUR/USD has gone in the bucks favour this week with a three cents gain to push the pair down to $1.3775 this morning. No major data. US markets closed for national holiday.

Pound:

A stellar performance by sterling yesterday saw impressive gains against the majors, with the pound taking over one and a half cents off the dollar to hit $1.6135 and has continued to extend gains into this morn-ings trade. We saw a mirror performance in GBP/EUR as a one and a half cents was also put on the currency pair in sterling's favour, hitting 1.1725 and also extending gains Thursday. The move came yesterday around 09.30 as the Bank of England released its inflation report, surprising some analysts with their hawkish tone. Even though they indicated the door was left open for possible further quantitative easing, it seemed it may not happen early doors, supporting the value of the pound. GDP growth was forecast to slow next year with exports having failed to rebound as expected, but growth would pick up to over 3% in two years time. The pound is also benefitting from underlying weak dollar sentiment after the QE2 move by the Fed, and the ongoing saga of sov¬ereign debt issues in the eurozone. In the UK, investors will focus on the start of the G-20 conference in the absence of major data on the state of the UK economy. Data 09.30: UK Q3 mortgage and landlord posses¬sion statistics & Sept CML regulated mortgage survey.

Euro:

A weakening euro has seen losses posted against the dollar this week, but the big decline has come against a rallying pound. The reason, Irelands troubles were put on the back burner for the last several weeks, but this is what people have turned their focus to now. Irish and Portuguese bonds came under increased pres¬sure Wednesday as the dimming fortunes of the eurozone’s weaker economies stirred fears that other countries besides Greece may need a bailout. Portugal had to pay record-high yield of 6.85% to attract investors for an offering of 10-year bonds, adding the challenges Lisbon faces as it tries to repair its public finances. The prob¬lem of European sovereign debt isn’t likely to go away any time soon, and the big worry is what might happen if a big EU economy like Spain will come under scrutiny. To highlight the plight of Irelands fall from grace, traders yesterday were predicting Allied Irish Banks will soon be fully nationalised as the cost of insuring bonds in the bank soared to record levels. No major data. France closed for national holiday.

General:

• The G-20 meeting, in Soul will be watched closely by currency traders as nations are worried certain countries are manipulating their currencies by devaluation.
• Spot gold is at $1,406.00 a troy ounce, up $2.60 from its New York close on Wednesday.

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