• Dubai World property scare eases as FTSE recovers
• ECB prepares to withdraw from QE activities
• US employers shed less jobs than any period since 2007

Dubai World Property Scare Turns the Heat Up

As turkey’s make their way to our dinner tables for Christmas, Sterling faced volatile trading conditions between 1.6338 and 1.6722 throughout last week. Investors continued to battle between a state of risk-aversion and risk-appetite ahead of the news that Dubai World, property arm may default on its US$60bln loan commitment. Creditors may seek to take control of part of the Dubai Waterfront property, the size of Manhattan island. The fear for the UK is that much of this $60bln is underwritten by UK banks, namely RBS amongst others, which has already had its lion share of troubles since the start of the recession last year. However, the risk subsided early last week and the pound recovered on the back of the FTSE retracing earlier losses to the current level of 5,320 as investors came back into the market. Gold couldn’t hold its record high last week of $1,226 as investors moved away from the commodity and it fell to its current level of $1,136, a fall of almost 6%. Australia was also reported last week to overtake the US as the second largest gold producer behind South Africa.

Alistair Darling has a busy week ahead of him as he balances the job of managing banker bonuses whilst preparing for the unenviable task of reporting his pre-Budget report on Wednesday. The UK Chancellor has warned RBS that he is prepared to crack down on the Christmas bonuses paid to employees. The tax payer owns 85% of the bank and the government is prepared to step in with measures to control bank paid bonuses if they feel they are not reasonable.

The Reserve Bank of Australia continued to lead the way of commodity driven economies by raising interest rates for the third consecutive month last Tuesday. RBA Governor, Glenn Stevens approved the 25 basis point increase to take the Australian core interest rate to 3.5 per cent. However, investors reacted in a sanguine manner with many pundits taking the view that the rise had already been priced into the market in the weeks preceding the announcement. The move will further increase the attractiveness of the Australian dollar as a currency of choice for carry trade investments going into the new calendar year.
Looking ahead this week for the UK we have manufacturing production on Tuesday, followed by the all important BOE interest rate decision later in the week.

ECB Prepares to Withdarw From QE Activities

European Central Bank announced on Thursday that it intended to begin unwinding the monetary support provided to the Eurozone. Jean-Claude Trichet gave no indication as to when he expected interest rates to begin to rise again. Trichet also said that they would cease lending to banks for greater than a 6 month period from March of next year.

The ECB made no surprises when they announced that there would be no change in December to the 1.0 per cent interest rate, but did say that interest rates have to rise. With growth remaining well below potential and inflation clearly below 2% in 2011, even a normalization of rates would be very premature and could do more harm than good for the Eurozone.

The euro moved within striking distance of a 16-month high of 1.5144, but fell just shy of this and managed to only ease back towards the 1.50 level. Once the non-farm payroll figure was released at lunch time on Friday, risk came back to the market, equity markets pushed forward and the euro retraced back sharply to 1.490 falling 1.5 per cent in an hour.

A quiet week in the Eurozone, relatively speaking, as ECB president Jean-Claude Trichet speaks this afternoon. However, aside from that nothing else of note due out for the region that would be seen to significantly push currency markets.

US Employers Shed Less Jobs Than Any Period Since 2007

US unemployment numbers fell by the lowest number since 2007, as US employers managed to shed only 11,000 jobs in the previous month against an expected 119,000. This means the US unemployment level declined to 10%. An interesting point to note from this unemployment figure is that 50% of people between the age of 16 and 24 are currently unemployed. A survey of 88 economists revealed an expectation that the unemployment level would rise to 10.2%.

The tremors sent through equity markets at the beginning of last week corrected as the week went on. Investors took comfort that the Dubai property company, Dubai World would finalise a deal that would suit its requirements. This helped douse out the flames on the fire that threatened to spread through the stock markets across the world. Investors came out of their places of refuge and saw the FTSE, Eurofirst, Dow and Asian equity markets return some of the huge gains experienced over the last 6 months.

Bank of America declared last week that they intend to repay the $45bln of TARP money committed to them by the US government earlier this year. At the end of last week they managed to raise $19.3bln selling securities at $15 a share. This was the largest single sale of stock by a publicly listed company in the US since 2000.

The institute of Supply Management’s Non-manufacturing index fell to 48.7 in November below the 50 level which indicates expansion in the sector. This is the first dip in manufacturing seen in the US below the 50 level since July of this year.

As far as data is concerned this week, Fed Chairman Bernanke is due to speak later today on his view of the US recovery, and on Friday the retail sales figure is expected to show that sales are continuing to improve in American stores ahead of Christmas.

By Marc Lim, FX Dealer

• USD seen as the safe haven again
• Is there still hope for Sterling?
• German sentiment figures support the euro

USD seen as the safe haven again

Last week saw several good pieces of data for the US with Housing, Consumer Confidence and Unemployment all coming in better than expected. This added risk appetite back into the market and saw sterling rise to the dizzy heights of over $1.67. However, world markets were suddenly rocked on Friday morning from the news that Dubai has announced it has major debt problems to the value of upto $80bln. The debt was brought about by the huge construction spree aimed at transforming its economy into a regional tourism and financial hub. The global recession brought about a fall in house prices of around 50% and left the country asking creditors for a six-month standstill on debt repayments. The dollar therefore strengthened off the back of this, as it has recently been seen as a safe haven currency by investors. This morning however, the Central Bank of the UAE announced it would “stand by” its countries lenders and offered support for its banks, which has eased concerns that the losses from Dubai will spread globally. This week sees the usual steady flow of data with the highlights being the ADP Employment figures on wednesday and the Non-Farm Payrolls on Friday afternoon which, as always, is a market mover.

Is there still hope for sterling?

The Bank Of England’s Governor, Mervyn King, has kept an open mind about any further Quantitative Easing last week. The surprise contraction in the recent 3rd quarter GDP figures hit the Pound badly and forced the Monetary Policy Committee to think hard about their short and medium term strategy. The UK is well and truly behind the U.S., Japan and Germany in the exit from the global recession with recovery proving to be slow and difficult. While there doesn’t appear to be an immediate risk to the UK’s credit rating, the BoE have indicated that policy tightening would have to take place over the next 2 to 3 years, which highlights the slowness of the central banks journey to get to the benchmark inflation rate of 2%. On the brighter side, the CBI announced retail sales grew at their fastest pace is 2 years, so hopefully this will be accompanied by strong Services and Manufacturing PMI data this coming Tuesday and Thursday.

German sentiment figures support the Euro

The German Business Climate Index rose to 93.9 from an upwardly revised figure from the previous month of 92. This was the highest level seen since August last year which shows how Germany has well and truly led the Eurozone out of recession. This figure gave encouraging news on exports and supported the current business situation. The euro has also been seen as one of the safe haven currencies, particularly in the light of events such as the Dubai debt crisis. One major concern for the European Central Bank though is the fact that lending in the Eurozone is contracting at an accelerated pace. Lending was down 0.8% from 0.3% in October, which will give the ECB plenty to discuss when they meet this week to discuss monetary policy. Watch out for Jean-Claude Trichets comments on Thursday afternoon.

By Nick Harrison, FX Dealer

• Inflation concerns hamper thoughts of recovery
• ECB out of recession
• Gold takes centre stage as dollar tumbles

Inflation concerns hamper thoughts of recovery

The pound had another dramatic week as the ever anticipated inflation report gave it a real slap in the face. The Bank of England members tried to give some hope to an already battered economy and perhaps raise a smile on the ever concerned consumer. Alas, it didn’t do anything but confirm this country as almost third world. Last week started off with a possible downgrading from Fitch and as if we didn’t know it we are most at risk for a cull from the major economies. Perhaps it’s the 800bln debt were carrying that brought them to this conclusion. For my mind this is old news but it was to the detriment of the pound and traders sold it off like a 2 for 1 sale down at Tesco. So comes the inflation report and Mervyn King added a few more nails to the coffin. Whilst he did see improvements and possible inflationary pressures somewhere along the line it wasn’t enough. Even when there were huge dollar sell off’s sterling didn’t benefit as much as other higher yielding currencies and gains were limited. As gold reaches high after high sterling is being bought in much more limited amounts. It is still perceived as high risk and whilst it will not be used to fund carry trades it is this confidence in the currency that will shackle it for some time to come. All that was taken from the report was that we could see further Quantitative Easing in the future. And with that brings further pain to the consumer. Mervyn King will now don the cap of Scrooge in a not so happy ending for most consumers this Christmas. Had the markets more faith in the dollar then we would see the pound crumble in to obscurity. So what can we expect this week? Perhaps it’s the weather but Im feeling rather glum. It was November last year that the pound was on the back foot and this year is no exception in the lead up to Christmas. We have inflation figures tomorrow which will only compound the report for last week and could bring further pound weakness with it. I’m trying, I’m trying…..markets expect a healthier retail sales figure this week on Thursday which could bring a bit of cheer to the market and to the office here so I’ll hold on to that hope and start praying. I will end on a good note though. The FTSE is holding about 5,300 (not that anyone really can see why) There I go again…

ECB out of recession

Harmonised eurozone data is expected this week and should show recovery is setting in. I have a bit of an issue with the word “Harmonised”. This suggests that each of the economies is working well together for a greater good but yet the Eurozone as a whole is about as unbalanced as comes. German and French GDP is down again and inflation in Ireland is down 6.6%. Am I missing something? Apparently. There was great cheer as the Eurozone stumbled out of recession, albeit on a technicality. Ask anyone, anywhere, anytime and the man on the street may disagree but economists loved to be proven right so let’s hope this week they are proven wrong, if only to bring a little more reality to the situation. Eurozone CPI is due this morning and could compound the ECB’s ideas surrounding its loose monetary policy as it tries to come up with an exit strategy. Exit strategies are the least of their worries as there is real concern for the economy coming in to New Year. I have real concerns around Germany and France and the strong currency headwind they are trying to negate. This makes for an even tougher job for Jean Claude Trichet.

Gold takes centre stage as dollar tumbles

Dollars dollars everywhere but do we care? Markets are apparently taking all this recovery chatter in their stride when it comes to the Dollar. But are they? When you look at it properly the flood of money in to gold is just another safe haven bet. Perhaps it’s the fact it’s shiny and lovely to look at that people forget this. Whatever it is I can see 2010 being the year for gold. Further uncertainty and boredom of the dollar will see other assets benefit as the greenback takes a back seat. China are once again looking to diversify but I think they just like the sound of their own voice and this story doesn’t carry the weight it did at the end of last year. US consumers will be in focus this week as we have retail sales figures today which while expected to be better then last month that wouldn’t be very hard. They need to better a -1.5% figure for September. The cash for clunkers programme will aid this figure so expect rather large holes to be picked upon its release. Please bear in mind that the cash for clunkers programme is all but gone now. Inflation figures on Wednesday will back up the rhetoric from the fed that they aim to keep rates at historically low levels for some time to come. Stock markets and Gold will look to benefit from a market now being ambushed by fear. If peoples hopes were up then it is without any real substance. Hope is still a wonderful world but when it comes to finance the figures never lie.

By Conor Sheridan, FX Delaer

• Is the end in sight for quantitative easing?
• Carry trade concerns keep dollar suppressed
• All eyes on German fundamentals for Euro growth

Is the end in sight for quantitative easing?

As the markets rested yesterday, our countries leader continued in his seemly favourite past time of the moment; the slow demise of his reputation. Prime Minister Brown retreated from his proposal for a financial transaction tax, or ‘Tobin Tax’ after strong criticism from the U.S., ECB, Canada, Russia and the IMF. Brown floated the idea for the G20 finance ministers and central bankers meeting this weekend in St Andrews, but the proposal was quickly shouted down.

In the wider picture the meeting did seem to carry waves of optimism in to Asian trading this morning with risk appetite in the ascendancy following. As a result cable has passed the 1.6750 mark, a level not seen since the start of August and looks to be well supported for the moment.

With the aftermath of Thursday’s BoE policy there seems to be a growing consensus that we are reaching the end for quantitative easing after the Bank extended the program by £25 billion. The noises from the BoE following a similar vein to other policy makers globally and this may have helped the sterling tone after the market got caught short over the decision. A quiet day on UK fundamental data today will leave focus squarely on Wednesdays inflation report and words from the BoE Governor Mervyn King, where he is likely to shed further light as to the reasons of the QE increase and whether or not the rumors of the end are justified.

Carry trade concerns keep dollar suppressed

Across the Atlantic news from the Washington based IMF said that pressure from carry trades has moved the dollar “closer to medium-run equilibrium, but it is still on the strong side”. This gave the green light to more dollar selling and has seen the greenback fall against a wide basket of currencies except the Japanese Yen.

With gold fast becoming the new alternative investment of choice to the dollar, this could mark the potential tipping point for investor psychology in the future and safe haven buying. With the world looking outside of the worlds largest economy for hope, Moody’s changed its China outlook to positive from stable, citing the government’s success in steering the nation through the global financial crisis. The rating action affects the government’s A1 foreign and local currency bond ratings. Moody’s said that the country’s very strong international investment position has insulated it from the global financial crisis and reduced to a negligible level the risk that China could pose for a future balance of payments crisis. It will be interesting to see how the Yuan’s weakness due to being pegged to the slipping U.S. dollar will affect the trade relations between the two economic super powers.

This week investors will be watching to see if the Unemployment claims due for release on Thursday will come out on a par with last month at 512k as expected, but with the country reporting figures of over 10% of its population being unemployed, it could perhaps be overly optimistic.

All eyes on German fundamentals for Euro growth

The Eurozone this morning has seen Germany posting a trade surplus of €9.9 billion in September, down from €10.6 billion in the previous month. The breakdown showed exports up 3.8% m/m, while imports rose 5.8% m/m. Still, the three months accumulated trade is improving and data points to a positive contribution from net exports to overall GDP growth in Q3. The stronger euro doesn’t seem to have dented export demand, which seems to be stabilising judging by orders data.

It will again be Germany that the multination economy will turn to for its economic sentiment on Tuesday and its preliminary GDP figures due out on Friday.

By Lee Yoong, FX Dealer

• Will the UK increase QE and decrease sterling demand
• Will risk taking continue to prosper following bullish US GDP
• Euro pullback may turn into reversal should dollar recover

Will the UK increase QE and decrease sterling demand

Last week saw the buyout of Standard Life by Barclays for 266m which started the week off with sterling being bought, this mildly countered the negative GDP Q3 release within the UK the week before. The markets have seen sterling continue to be on the back foot against most majors. With UK data thin on the ground last week, we saw heavy swings via fundamental releases from the Eurozone and America. The positive US GDP figure was the main driver on Thursday and caused sterling/dollar to trade up to 1.6570 as risk came back to the market. Over the weekend we have seen sterling being sold off due to profit taking and in preparation to Thursdays Bank of England (BOE) meeting. With the three major economies expected to keep rates on hold It will be all about sterling and whether or no the BOE will vote to extend quantitative easing after the UK saw continued negative growth in Q3. The market is expecting a £25 billion increase but there is talk about the possibility of £50 billion. If we see the latter then sterling could be heavily sold and we could test the low 1.60’s. The main thing to look for this week is the statement afterwards which will set the tone for November.

Will risk taking continue to prosper following bullish US GDP

The dollar dropped to a fresh 14-month low against the euro last week striking levels around $1.5060, however, the greenback later regained its strength due to the price of oil falling almost $2 per barrel to $78 and Gold falling 1% to $1,054.45. US consumer confidence was seen to rise but was nowhere near expectation and the nelson survey reported a 4 point increase to 84 from July but only a reading above 100 is considered inflationary or optimistic. We saw risk aversion early in the week as sterling/dollar traded between 1.6250 and 1.6410 as all eyes were eagerly awaiting the Q3 GDP figure to set the tone for the global economic recovery leading into 2010. We saw US stock markets decline late on Wednesday and an aggressive sell off with the main culprit being US new home sales down 3.6% from September. US Q3 GDP was expected to be 3.2% which came out at 3.5% and risk came back to the market which saw sterling benefit. This week has a whole host of US data and with the rates likely to be kept on hold this week, manufacturing, housing and employment data will determine the path of the US dollar as we move through Q4.

Euro pullback may turn into reversal should dollar recover

Worse than expected european jobless claims rose 26k month on month last week, this put the euro under pressure and for most of the week traded between 1.0950-1.11 GBP/EUR and 1.4750-1.5060 for EUR/USD. The move to above 1.50 was due to the dollar sell off late on Thursday as risk taking came back into play and sterling was the main benefactor as we saw GBP/EUR test a new 6 week high at 1.1203. This weekend has seen some profit taking on the back of these two big moves, this weeks focus being on the ECB rate decision and statement that follows, coupled with US dollar recovery as risk aversion comes back amidst preparation to the three Interest rate decisions.

By Tom Georgeson, FX Dealer

• GDP Stampedes the Bulls into Submission
• Trichet Sounds Battle Cry Against Strong Euro
• Will GDP Take the Sting Out of the Ailing Dollar?

GDP Stampedes the Bulls into Submission

A more sombre tone towards the back end of the week helped end the high hopes from everyone on the recovery of sterling. Were we just hoping without the presence of any real backbone? The markets shocked us all last week by making significant moves of which nobody could really put there finger on why. It certainly wasn’t based around fundamentals and this is what stopped it in its tracks as the week came to an end. The Bank of England members did their bit to drive the market with some classic verbal intervention but conflicting views also helped sink the pound when Quarter 3 preliminary GDP figures came out worse then expected at -0.4% vs. 0.2%. QE was once again the topic of much discussion in the office. It’s a game of cat and mouse as we wait and see if Mervyn King will get his way and another 25bln gets pumped in this recession burdened economy. This is all very interesting but my fear is that sterling will be under some very serious selling pressure and next months MPC meeting/Inflation report could wipe us off the planet. Our thoughts are that we will see further QE and with this we could the pound being sold off quite heavily. Interest rate hikes are on the cards but not for at least 6 months and until then the pound will be under scrutiny for further signs of weakness. A week of positivity was crushed on Friday morning as GDP decimated the week’s gains. Data is light on the ground this week so the pound could continue its downward trend which started on Friday.

Trichet Sounds Battle Cry Against Strong Euro

Finally the ECB have made some interesting noises in relation the strength of the Euro. Can the market justify 1.50? And more importantly what impact will this have on the heavy laden export economies of Germany and France? Germany will remain firmly in the spotlight this week with a whole host of data. We can expect to see key inflation, unemployment and retail figures which will give traders plenty to chew on as the week progresses. We could see a significant correction in relation to the Euro rally as reality kicks in. A massive dollar sell off has helped the Euro strengthen as concerns over the global economy are less of a concern and the dollar loses its safe haven ability. However we still need to be concerned with the ECB’s stance on inflation and whether or not it will continue its easing policy further in to next year. Whilst Mervyn King champions for a weak pound Trichet must consider whether further intervention is needed but will it carry a lot of weight? It hasn’t done as yet so perhaps a German reality check is in line.

Will GDP Take the Sting Out of the Ailing Dollar?

Dollar weakness is still dominating the market and this could continue for much of the week. However the market will be heavily anticipating Thursday’s GDP figure which could show a significant increase from last quarter. Forecasts are for a 3% annualised rate after shrinking 0.7% in the previous 3 months. So what can we take from such a sharp increase? Is the house now in order or is it simply down to extraordinary measures that have a limited shelf life? I’ll take the 2nd option and here’s why. Consumer spending is up but why? Put that down to tax cuts and a sprinkling of government spending. Unemployment is still rising and this will further impact consumer spending as government intervention recedes. Consumer spending is up but business spending is not. This leaves a significant gap in economic capacity which in turn affects the GDP figure. So all this could point to a significant decline in the last quarter of the year. The expectation of such a positive figure could impact the dollar heavily much like the GDP figure in the UK last Friday hit the pound hard.

By Conor Sheridan, FX Dealer

• Pound under further pressure?
• Angela Merkel in - Stock markets out?
• Significant test for the US stock markets ahead of ever important numbers this week

Pound under further pressure?

This week is going to be a significant test for the pound. Last week we touched a 5 month low against the EUR and USD mainly due to risk aversion. Risk aversion is again going to be coming in waves this week with a data-heavy few days ahead. As the pound is currently considered a risky asset, whenever bad news hits the stock markets or any higher risk products, unfortunately the pound suffers as traders sell it and buy into safe havens such as the USD and Yen. A report on the Financial Times this morning shows signs that UK inflation is set to soar in the medium to long term and the report suggest that inflation poses a greater risk to the UK than any other developed country. One of the main reasons for this is that investors fear the Bank of England’s purchase of £175bln of government bonds (30% of the gilts market) is more likely to trigger a surge in prices. The most important figures this week for sterling are the GDP numbers due out tomorrow morning and the USA non-farm payrolls due out on Friday afternoon. If either of these figures are negative and under-expectation, we can expect to see the pound suffer heavily. The general consensus for the direction of sterling this week is not good! We can probably expect to see more declines and fresh 6 – 8 month lows. In the short term, levels above 1.60 against the USD and 1.10 against the EUR look very attractive.

Angela Merkel in - Stock markets out?

Last night Angel Merkel swept to a second term as German Chancellor. German markets have reacted well to this as she is expected to implement business friendly economic reforms. However, German consumer price index figures out this morning have showed a negative figure and currently the EUR is beginning to weaken back towards levels seen last Friday. German unemployment figures on Wednesday are expected to show an increase of 0.1% from 8.4% to 8.5%. Eurozone consumer confidence due out tomorrow is expected to show a marginal improvement and eurozone inflation due on Wednesday is expected to remain in negative territory. This will be viewed as positive as it wont show a contraction in the inflation. Unemployment figures within the eurozone due on Thursday will probably rise 0.1% from 9.5% to 9.6%. All these numbers may push stock markets in the Eurozone down and in turn spur risk-aversion with investors again seeking safe havens like the USD.

Significant test for the US stock markets ahead of ever important numbers this week

This week could see vast movements in US stock markets and the USD. Tomorrow brings us the first anniversary of the Dow Jones’s biggest one day loss of 777 points, triggered by the bailout bill in the House of Representatives. Wall Street ended last week with its biggest weekly drop in two months after uncertain economic news. I believe that with the amount of extremely important and big figures due out this week, traders WILL remain on the defensive, especially if the numbers are below expectations. Tomorrow sees US consumer confidence, Wednesday US GDP, Thursday we see Initial Jobless Claims, Personal Income and savings data and of course on Friday we have the ever important Non-Farm payroll figure which over the past 3 -4 months has moved markets significantly. Forecast for the payroll suggest a 21st consecutive monthly decline to 180,000 jobs. Traders are expecting a steady 2 days ahead but mid-week we are all preparing for a significant sell off and correction within the market. If the data is negative, stock markets will decline world wide and in turn this will force investors to seek safe havens like the USD and JPY. We may see the dollar strengthen further this week and the pound could come under extensive pressure!

By James Wilding, FX Dealer

• UK Credit Markets Continue to Weigh on the Pound
• Market Awaits Fed Meeting for Direction
• Euro Continues to Out Perform Sterling and Dollar

UK Credit Markets Contine to Weigh on the Pound

Last week saw Sterling start on a high against the dollar and head one way for the rest of the week; down. This would have been a disheartening result were it solely on the back of risk aversion, but for the first four days the greenback has been suppressed from the very opposite. Equities, credit derivatives, Gold and Oil all reached monthly highs further boosting market rallies. In a week where investors were looking to buy back into risk, it would seem they were heading into everything, everything except for the Pound. Despite a surprise improvement in the inflation figures last Tuesday and an improvement in House Prices released this morning, comments from BoE Governor Mervyn King kept true to from and were of a dovish nature suppressing Sterling sentiment. These worries were further extended when on Friday Lloyds Bank had been forced to abandon its plan to withdraw from the government’s toxic debt insurance scheme after failing to raise enough capital to meet the FSA’s stress test. With Government spending cuts imminent due to raising public debt and a lack of foreign interest, the long term outlook for sterling is uncertain. This week markets will be looking towards Wednesdays MPC minutes for some clarification on a quite data week for sterling.

Market Awaits Fed Meeting for Direction

Across the Atlantic this morning the dollar with limited trading to due to a Japanese Public holiday, reached a two-week high against the pound and rose versus 13 of the 16 major currencies. This move preempts the CB Leading index at 3pm today which economists said will show an index of leading indicators gained a fifth month, backing the case for recent hints that the Federal Reserve is wanting to wean the economy off support. Thursday will bring US unemployment claims and existing home sales to see if these plans are premature or not. Later in the week Investors will be looking out for further expansion on this on Wednesday evening with the FOMC Statement and the Fed Interest rate which is predicted to be held at 0.25%

Euro Continues to Out Perform Sterling and Dollar

Last week saw the Euro move in the opposite direction to Sterling, proving to be an alluring currency for risk hungry traders, rising to a yearly high against the dollar. The currency of the sixteen member nation has been reaping the rewards since its first and second largest economies (Germany and France respectively) declared they had left the recession in the second quarter, and last week Wednesdays inflation figures supported the continual upward sentiment. This week is a little heavier on the Euro data front and will have traders watching out for German and French manufacturing figures on Weds and the all important German Ifo data predicted to increase on last month.

By Lee Yoong, FX Dealer

Last week we saw a continuation of the global rally that kicked off in March of this year, the FTSE hit highs above 5000, the S&P 500 is up 50%, Gold was above $1000 a troy ounce and Oil was well inside $73 a barrel. The key question is “how long will this last”? If we study the reasons for the rally, we quickly come to the conclusion that loose monetary policy and Quantitative Easing are the main drivers. These moves are a slight indication that the methods are filtering into the pockets of consumers globally. We must look upon these gains with caution, much of the rally is being fuelled by investors who were stung heavily by the collapse, thus, looking to claw back their losses as soon as possible. Evidence of this is the profit taking that we are currently seeing across many asset classes, Oil is down $5 from last week. The potential for a correction is growing and the house of cards being built could be destroyed by that most destructive of winds, the giant sell off.

On the positive side Global Finance Ministers at the G20 agreed to continue the stimulus packages in place and M&A activity dominated headlines with the front runner being Kraft’s move for Cadburys.

Support the Pound

Bullish manufacturing and industrial data helped sterling maintain its current position within currency markets last week, Mervyn King added to this when the MPC announced that they would not increase the current level of £175bn being pumped into the UK economy. We will see on Tuesday how all of these emergency measures are affecting the real economy with the CPI figures, year on year figures should show that prices inflated by 1.4% in the stricken economy, this will be a welcome figure in the UK as it will support continued low interest rates and quieten critics of QE who fear that all this extra liquidity will cause hyper inflation. Although we are not expecting Sterling to jump ahead on the grid, this week should allow the currency to hold its head high.

Is the Eurozone Still Deflating?
Figures released tomorrow are due to confirm that the eurozone is still deflating, although not likely to be as bad as last month, economists predict the single currency zone to have deflated by 0.2% in the year to August. ECB president will be hoping that the figure is better than this prediction so that he can justify his interest rates of 1% and not cut at his next policy meeting on October the 8th. German ZEW Economic Sentiment on Tuesday will give us an indication as to the optimism within the industrial flagship of the zone.

Sell the Dollar!

The US dollar index, which measures the dollar against a basket of 6 currencies, is at lows not seen for 12 months, the story is mostly one of risk appetite where investors move out of the safe haven of the US currency into riskier assets. The US dollar is now the worlds favourite funding currency. However, the US dollar is depreciating against its Japanese and Swiss cousins which indicate that there is another power at work to demise the dollar. This power is likely to be the return of the black cloud hovering above the dollars reserve status, the United Nations have suggested that we need a stronger alternative for global bank reserves, as a result governments and central banks are shifting their weight of dollars in a nervous move.
On Tuesday we will see the latest Retail Sales figures come out of the worlds most powerful economy, expected to come out at 1.8%. On Wednesday we have the all important CPI figure from the US, this is expected to show that prices increased by 0.4% from the month before.

By Keith Miller, FX Dealer

• Sterling awaits Interest Rate Decision
• Germany in Focus again
• Consumer Data drives Dollar

Sterling awaits Interest Rate Decision

The Bank of England will be one of the main contributors to sterling’s movements this week. An interest rate decision awaits and although we don’t envisage any great surprises, they will hold, it will be interesting to see if we get any further information on the quantitative easing program. As we have

mentioned in the past we don’t believe the program will kick in effectively until the start of 2010. Elsewhere we have GDP figures on Thursday and with industrial and manufacturing as well we could have a very interesting and volatile week for sterling. It has already started the week on the front foot but this could become a false dawn as the week progresses.

Germany in Focus again

All eyes were on the ECB last week and the statement of intent behind the interest rate decision announcement. Trichet signaled that they would continue their loose monetary policy and the Euro softened as the afternoon progressed. Sterling made some decent gains against the Euro as the market reflected on where exactly the economy lies and just what direction they are pointing the economy in. More German/French data this week will help the markets with this question and should we see the expected positive forecast then the Euro could set up a nice week for itself.

Consumer Data drives Dollar

Further signs of improvement in the US could be seen when consumer sector data is expected this week. Preliminary figures for September (Friday) are expected to improve on last months figures of 65.7 with a forecast of 67.
Trade Balance and Unemployment claims are also due out on Thursday. For the Trade Balances, a positive figure will indicate strong exports against imports. Unemployment Claims are an indicator as to the health of the economy and an indication as to the future of consumer spending. Last weeks figures were disappointing but this was not reflected in the Non Farm Payroll data last Friday. Non Farm Payroll surprised to the upside. Forecast to come in at -230k, the actual figure was -216k, however last months figures were revised upwards meaning minimum gains for the Dollar.

By John Stevens, FX Dealer