Pound rises while German and Swiss prices fall

04-03-2009 15:34

The sterling reached a seven week high of 1.4831 and rallied almost 200 pips, while the service PMI indicator is better than expected, which implicates that economic fundamentals are improving. The service sector covers 70% of UK’s GDP and increased from 43.5 to 45.5; the fourth consecutive month of progress. Buying Gilts in the market place could result in a considerable recovery of UK’s economy, while consumer lending will be stimulated by easing credit markets. Nevertheless, the pound lost some if its gains today due to the outlook that the U.S. employment report, which will be published soon, will turn out gloomy.

Trichet still believes in target rate, despite German and Swiss fall in prices

The single currency fell to a 1.3397 level but recovered later, as stock markets have begun to rise. The revision of the service PMI reading for the region from 40.1 to 40.9 boosted risk appetite and added some brightness. Yesterday the ECB lowered rates by 25 bps, which was less than forecast, while the euro reached a 1.3516 level. Nevertheless, the statement by the president of the European Central Bank that the 1.25% benchmark rate could be reduced even further indicates that more easing is a serious option. He also said that they may decide on quantitative easing measures during the next policy but he also declared that they may pause the quantitative easing. Trichet still is convinced that the ECB will keep inflation below the target of 2%. This could be questionable as German import prices in February dropped by 6.4% annually; the worst drop in a decade. The increasing deflation was also proved by the 0.4% fall in Swiss CPI to a record low since 1959.

Rising demand for high-yielding assets

Pressure on the USD/ JPY increased as a result of the fact that for the second time USD/ JPY re-tested the 100.00 price level. It’s likely that the rising demand for high-yielding assets will give back the Yen’s status of a funding currency, through which it will be more vulnerable to carry trade flows. The dollar is being considered as a ‘safe’ currency but during the last months this status decreased. Despite the possibility that the dollar remains its safe status, it is wise to monitor this correlation as markets become more stable.

Fourth consecutive report of US job losses ahead

Optimism was boosted in Europe by the positive fundamental figures, while the dollar faced some pressure after finding some support during the Asian trading session. The non-farm payroll report is expected to result in another 660.000 US job losses in March, which would mean the fourth consecutive report of more than 600.000 job losses. Furthermore, it is to be expected that in February unemployment will increase from 8.1% to 8.5%, which could erase sentiment and stimulate the greenback. Nevertheless, risk appetite could return if the ISM non-manufacturing report shows a considerable recovery that corresponds with the manufacturing reading. Economists expect a minor increase from 41.6 to 42.0. Fed chairman Ben Bernanke will give a speech today at a conference in Charlotte, which could also result in event risk if he states that quantitative measures are successful or failing.