8th February 2010

Daily outlook

Sterling plummeted to an 8 and a half month low against the dollar on Friday as qualms over the euro zone’s sovereign debt issues boosted the appeal of the greenback as a safe-haven currency. These anxieties over the debt problems in the Euro Zone have extended beyond Greece to Portugal and Spain, hitting riskier assets.

As a result the pound has been falling in tandem with the euro against the dollar. UK shares fell 1.5 percent on Friday due to concerns over Britain’s own public finances. Uncertainty ahead of the June general election is also weighing on sterling sentiment contributing to eight and half month lows against the US dollar.

Friday’s main event saw the release of the US governments non-farm payrolls report which revealed an unexpected loss of 20,000 jobs in January. This figure contrasted heavily with analysts expectations for a 5,000 rise. Unemployment in the world’s largest economy was revealed to have fallen to 9.7%. Elsewhere gold prices firmed today, in a technical bounce, after hitting a three-month low last week in the wake of the financial instabilities in Europe.

Today sees no local data of note and only low tier data from elsewhere. The Euro Zone sees the release of a Sentix economic survey. Across the pond, US employment trends are up for release in the afternoon session.

  • United States
    Employment Trends (Jan)
  • Euro Zone
    Sentix Index (Feb)

Currencies outlook

Sterling

The pound has suffered heavily in the wake of the Bank of England policy meeting. The UK economy remained sluggish, having barely escaped the claws of recession by rising 0.1% in the fourth quarter, and crucially the Bank of England is nowhere near contemplating exiting quantitative easing. The pound fell sharply against the dollar on Friday, partly due to position adjustment ahead of the weekend, marking its lowest weekly fall since late September 2009. Earlier in the day, producer prices data showed further upward pressure on UK inflation. British manufacturers’ raw material costs jumped up much more than expected and the rise represented the sharpest annual rate since October 2008. The Bank of England policy meeting earlier in the week marked a non-event for the pound as interest rates were kept on hold. The Bank also revealed that UK monetary conditions are likely to remain loose for the considerable future. As a result, the pound capitulated to an almost 9 month low against the dollar and also lost recent gains against the euro. Tomorrow sees the eagerly anticipated trade balance and expectations are for a narrowing of the trade gap to £2.7 billion in December, form £2.9 billion in November.

US Dollar

The dollar was indeed the main victor last week as rising investor risk aversion re-entered the market. Fiscal concerns in some Euro Zone countries enhanced the appeal of the safe-haven currency and sent the dollar to a nine month high against the euro and furthermore, an eight and a half month high against sterling. Friday saw the release of conflicting jobless data. On one hand the non-farm payrolls revealed that the economy unexpectedly lost 20,000 jobs in January compared to forecasts for a 5,000 rise. However, the overall unemployment rate illustrated signs of healing the devastating recession of the past two years. The figures reported that the unemployment rate fell 9.7% in January from 10.1% in December. This marked the lowest unemployment rate since August and raised hopes that the labour market is slowly but surely recovering. This week sees the release of US trade balance on Wednesday and US retail sales on Thursday which will serve as further indications on the economic state of the US.

Euro

The euro’s recent plight against the dollar was compounded by the fact that Germany’s industrial production slumped in December. This added further worries about the pace of recovery in Europe’s largest economy. Seasonally adjusted industrial production fell by 2.6% in December from the previous month reported the Federal Ministry of Economics and Technology in Berlin on Friday. Analysts had expected a rise of 0.5%. This sector’s breakdown was predominantly attributed to a sharp decline in manufacturing and construction. Moreover, the data came after a government report on Thursday which revealed that German new manufacturing orders fell 2.3% in December. The euro came under more pressure as the cost of insuring the debt of Greece, Portugal and Spain moved the Euro Zone against default price to record highs. In addition, Portugal backed a law that may further enlarge its swollen budget deficit. That news caused further jitters and sent investors into traditional safe-haven assets causing the euro to hit a near one-year trough against the yen and a nine month low against the dollar.

Japanese Yen

The yen gained on Friday as persistent worries about the Euro Zone’s fiscal stability pushed investors further away from risky assets. The contagion, seemingly spreading throughout Europe, has certainly weighed heavily on the Euro Zone. The yen, as a result, hit a one-year high against the euro. Investors surged to buy the yen amid a wave of risk aversion and it marked its highest level since February 2009. Japan’s Nikkei, however, has been placed under severe pressure as exporters once more struggle due to the stronger yen.