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Wednesday 30 June 2010

Strong Sterling 20 Month Highs Against Euro

Need Euros to buy that Canarian Dream Home? Halo Financials latest on the Currency Markets: Sterling continued on its path of strength early yesterday but is still buffeting very substantial resistance levels in most currency pairs. The Pound’s new found strength is partly due to fairly universal approval of the new government’s aggressive action to reduce Britain’s indebtedness and partly down to the slightly hawkish view espoused by Bank of England committee member, Andrew Sentence when he offered a more detailed explanation of his decision to vote for an interest rate rise at their last monetary policy committee meeting.

The gist of Mr Sentence’s report is that he is concerned that with UK inflation remaining stubbornly above the bank’s target, with the global recession unwinding, with the Pound being oversold and with reasonable domestic growth within the UK, the case for small incremental interest rate hikes was a solid one. He may well be right but whether the rest of the MPC is bold enough to risk the fragile recovery in the pursuit of lower inflation is an entirely different matter. Nevertheless, Euro buyers are seeing the best levels in 19 months, US Dollar buyers are getting their best levels in over two months and the Sterling - NZ Dollar and Sterling - Aussie Dollar exchange rates are back at the top of their ranges. This morning’s release of mortgage and lending data from the Bank of England may directly impact on these levels.

For its part, the Euro remains in the spotlight as the Bank of International Settlements has warned that European banks and some on the other side of the Atlantic are still on life support and have a long way to go before they are stable again. Banks in Europe and the UK are under huge pressure to bolster their balance sheets to ensure they won’t have to call on taxpayers again but that pressure is making it hard for them to set aside enough cash for loans which are essential is the economies of these countries are to grow out of recession. It does seem that taxpayers are guaranteeing the survival of banks which could and perhaps should have failed but the banks are not guaranteeing anyone else’s survival.

The queen is in Canada just days after the visit by the G20 heads and several thousand members of their entourages. All of that ought to bring some overseas earnings into Canada but Canada does really need it. Canada is one of the real success stories of the last two years of economic turmoil but the Canadian Dollar is a tad weaker than it has been of late; a tad more affordable to those who need to buy it and the Sterling - Canadian Dollar exchange rate has only been higher than the current level once since 1st March.

The British and German delagates walked away from the G20 meeting with a fair amount of pleasure that their views had been largely applauded by the rest of the delegates. That is no mean feat but it leaves the Pound in a bit of a quandary against the Euro. The UK government is actively cutting its budget to get a handle on excessive debt levels but the German government has more constraints imposed by Brussels which make it hard for Angela Merkel to cut back much more than she already has. The positive view of the UK plans are being reflected in the Pound’s new found strength but we cannot get too carried away just yet. Sterling is at the strongest level against the Euro since November 2008 but it is banging its head on several technical levels which are capping the move for now. Failure to get above €1.2320 would leave the Pound vulnerable to another downward leg which could take us all the way to roughly €1.17 without disturbing the upward trend. However, if €1.2320 breaks, then a stuttering push towards €1.25 is on the cards. There are a lot of 'Ifs' here but it is that kind of a nervous market right now.

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