Sterling reached an 8 week high against the US dollar as increased risk appetite once again dominated markets.
In fact the US dollar weakened against most of its major counterparts yesterday as the extra liquidity generated from the Bank of Japan’s (BoJ) decision to extend stimulus continues to entice investor appetite for high yielding assets. As a result the pound, the euro, New Zealand dollar, to name a few, all rose by at least 0.5% intraday yesterday against the US dollar.
Whilst US dollar buyers will be looking for further gains, given current sentiment and trend, there are some risks to consider.
Firstly the overall fundamental picture hasn’t really changed. The US economy continues to show signs of moderate growth; whilst the UK continues to be plagued by fears of an extension of quantitative easing and whether it will or won’t avoid a triple dip recession.
Secondly, there is the situation over in North Korea. Yesterday, the country warned that a war could break out at any moment as well as raising at least one missile into its upright firing position. South Korea has raised its alert level and discussions are taking place at a G8 meeting in London to urge North Korea to abandon its missile launches.
During any times of uncertainty, investment flows will typically go into safe haven assets. Given that the yen is under a lot of selling pressure following the BoJ’s decision to extend stimulus and that the Swiss Franc is capped to limit gains (these two are traditional safe haven currencies); that only leaves two places for investors to put their money – the US dollar or gold.
Elsewhere the euro continued to draw support as Italy managed to sell €4bn of 3 year bonds with the yield dropping from 2.48% to 2.29% - showing a surprise confidence in the nation, whilst yields on Spanish 10 year bonds also fell to the lowest since November 2010. The euro also drew support as the ECB’s monthly report stated that economic activity in the euro zone continues to be weak but should recover in the second half of the year.
Expect to see some profit taking today, following a good run on stock markets and other higher yielding assets such as the euro. As a result we could see weakness in GBPUSD but gains in GBPEUR. We could also see gains in GBPEUR today over concerns that Cyprus and Portugal will require deeper bailouts.
US dollar buyers looking for more upside may get that if retail sales and consumer sentiment figures disappoint in the afternoon as poor data will add to signs that the Federal Reserve will need to maintain stimulus measures.
10.00am – EUR – Industrial Production (Feb): Expected to improve to 0.1%.
13.30pm – USD – Producer Price Index (Mar): Expected to reduce to -0.2%.
13.30pm – USD – Retail Sales (Mar): Expected to contract to only a 0.2% increase.
14.55pm – USD – Reuters/Michigan Consumer Sentiment Index (Apr): Expected to reduce to 78.5.