Foreign Exchange: Pound Continues To Rally

The Pound continued to rally yesterday against the US Dollar, briefly trading above $1.48 in London, as UK stocks rose for a fifth straight day.

Global risk appetite improved helping the Pound against the lower-yielding currencies like the US Dollar and the Japanese Yen.

The FTSE 100 Index added another 0.5% in London.

Confidence is slowly returning to financial markets and investors are dumping dollar denominated assets in favour of higher-yielding currencies.

Whilst of some concern that the Pound’s gains are built in the main on risk sentiment, the UK currency is also benefiting from speculation that the emergency budget next week will be strong enough on spending cuts to reduce Britain’s record budget deficit.

The Office of National Statistics reported that UK inflation slowed in May for the first time in three months. This will ease price pressures within the broader economy and reduce the prospect of a near-term interest rate increase.

Peter Dixon, an economist at Commerzbank AG, said that “the UK doesn’t have an underlying inflation problem, and we could see inflation dip below 3% in July. The bank will leave its interest rate on hold until at least the second quarter of 2011.”

Bank of England policy maker Andrew Sentance said on June 13th that inflation has shown “resilience” and “upward pressure” on price expectations that will present officials with “interesting debates” in the second half of the year.

Whilst rallying against the US Dollar, the Pound fell against the Euro, dropping towards the major support level at 1.20. This followed the report on the inflation data yesterday and it’s the second time it’s the 1.20 level this week. It did though recover slightly later in the day, as a UK house prices were reported to have climbed to the highest level in four months in May – house price indexes are a key factor which affect the foreign exchange markets.

EUR/USD

The Euro yesterday rose to the highest level in two weeks against the US Dollar, as gains in global stock markets increased demand for riskier assets and prompted traders to end bets that the currency would decline.

Fabian Eliasson, head of U.S currency sales at Mizuho Financial Group Inc, said that “we have some good stock-market performance around the globe and it’s just spurring more risk appetite in the market.”

The Euro appreciated 1% to $1.2339, through the key $1.2295 level, indicating that further gains may be likely in the short-term.

Market Analysis by Adam Solomon, Torfx

Any opinions expressed in this document are aimed at helping readers understand market conditions and developing trends. Readers are wholly responsible for their own trading decisions.