Currency update June 22: market fearful of today's Budget

Published: 22 June, 2010

Currency update June 22: markets nervous about today's Budget.

Currency rates: June 22 AM
EURO/GBP - 1.196
US$/GBP - 1.474
CHF/GBP - 1.634
CAN$/GBP - 1.507
AUS$/GBP - 1.678
ZAR/GBP - 11.091
JPY/GBP - 133.83
HKD/GBP - 11.465
NZD/GBP - 2.080
HUF/GBP - 334.23

Sterling started yesterday strongly, rising to a 5 ½ week high against the US dollar of $1.4925/ £1 in early trading, but fell in late trading as traders became anxious over the effect of today's budget.
The pound strengthened after the People's Bank of China announced overnight on Sunday that it would proceed with reform of the exchange rate 'Peg' (i.e. fixed rate) between the Chinese yuan and US dollar.

In addition, data showed that house prices in London rose by 2.2% over the last month. This drove risk appetite and news on the yuan is expected to have a positive effect on US manufacturing, as Chinese goods become less competitive.

Despite this, the key event this week is today's emergency budget - the first of the new Coalition government. There is some anxiety over the pace at which the budget will seek to cut the deficit, as if it is too aggressive, growth could be stifled, whereas if the cuts are too lenient the deficit will not be addressed and the markets will lose confidence.

The pound could conceivably go either way against the US dollar and euro. It all depends on how the market reacts to the announcement.

In the Euro zone, there was no data out yesterday of any real importance. ECB Bank President Jean-Claude Trichet addressed the European Parliament.

Probably the most interesting piece of information released yesterday was a report by Citigroup that amended their outlook for the euro from 'negative' to 'neutral' as the single currency closed above an important 2008 low of $1.2330/ €1 - signalling an important 'technical' recovery.

Out today, we have data on the German business climate that is expected to show a small decline following the debt crisis.

In the US, the big news yesterday was the reaction to China's move to revalue their currency Peg against the US dollar. Despite an initial drop against the euro and sterling, many are expecting the US dollar to strengthen following the move by China.

The revaluation opens the door for US goods to regain some price competition against Chinese goods, which they have lacked since 2005. This should aid the US recovery.

There is a lot of volatility likely tomorrow with the UK budget data so keep a close eye on the rates so you don't lose money.

Elsewhere, overnight the NZ and Aus dollar declined on concerns that funding trouble at European banks would temper growth. In addition, the two currencies fell the most against the Japanese yen since December 2008 over fears that the Chinese central bank would intervene to limit gains after the currency peg was eased.

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