The Pound rose strongly against the US Dollar in trading early on Monday, before a sharp sell-off through the course of the day.
The Pound initially rose in foreign exchange trading as global risk appetite improved. This was on the back of regulators giving banks years to comply with new capital rules as well as reports from China showing a sustained improvement in the economic outlook.
The Pound hit a high of 1.5486 against the US Dollar.
But then there was a sharp sell-off through the course of the day, as investors concerned themselves over £61 billion of government spending cuts.
The Pound also looked fragile against the Euro as it lost 0.7%, despite the lack of economic data released.
UK union leaders said that they oppose the government’s budget cuts, increasing speculation that Britain may ease off fiscal austerity for fear of strikes.
The Washington based Commodity Futures Trading Commission have increased bets that the Pound will continue its recent decline against the US Dollar.
Hans-Guenter Redeker, an analyst at BNP Paribas SA, said that “if the global economy recovers, the subsequent positive terms-of-trade shock will heavily favour Canada relative to the UK. Even in the case where the global economy would go for a double dip, clean balance sheets will favour the Canadian Dollar.”
UK stocks rallied for a fourth straight day yesterday with banking shares making a rally after regulators agreed on the amount of capital lenders must hold, as they attempt to avoid a repeat of the 2008 financial crisis. RBS Plc and Lloyds Banking Group Plc both rose more than 2% on the day.
A raft of UK economic reports are due this week
The annual rate of inflation is expected to continue its gradual decline, but the Pound may decline sharply with the core CPI considerably lower than the headline rate.
A report from the Nationwide Building Society showed that UK consumer confidence rose in August for the first time in four months. The index of sentiment rose 5 points from the previous month and while the UK economy expanded at the fastest pace in nine years in the second quarter, the recovery is expected to slow considerably for the rest of the year.
The lower-yielding currencies such as the Japanese Yen and US Dollar weakened against the majority of the 16 most actively traded currencies.
The Euro bounced back against the Dollar, as the Basel Committee on Banking Supervision gave lenders as long as eight years to comply with higher capital requirements intended to prevent a future crisis of the magnitude that saw some UK banks come under government control.
There was initial Euro resistance above the $1.28 level, but it continued to rise further after the European Commission raised growth forecasts. However, underlying confidence in the Euro will remain fragile, which will tend to limit the scope of any upward rally.
The Euro may resume its decline against the Dollar, amid renewed concern over the solvency of nations from Portugal to Ireland.
The Australian Dollar continued to make strong gains against the majors yesterday, rising to the highest level in five months versus the US Dollar. It also broke under 1.65 versus the Pound for the first time in three months, amid signs of sustained economic growth in China and the US boosted demand for higher-yielding currencies.
Market Analysis by Adam Solomon, TorFX