Risk demand dampens with renewed Europe and China uncertainty

British Pound Sterling / US Dollar

Risk appetite turned sour yesterday as investor worries surrounding the political upheaval in Europe and slowing Chinese growth dampened demand for risky assets.

Despite this GBP/USD held firm on the day, initially trading to a low of 1.6078 as the risk trade faltered and greenback buying intensified, but then bouncing to an intraday high of 1.6131 after the London fix saw demand for GBP and EUR and risk appetite picked up somewhat. It is fair to say that the firmness of GBP/USD on the day could also be attributed to a broadly strong pound, as the UK currency continued to benefit from a relative “safe haven” bid in light of the evolving economic and political troubles in Europe.

Ahead of tomorrow’s UK Q1 GDP figure it is not likely that the release of March Public Sector Net Borrowing (PSNB) figures will attract too much attention this morning, although an increase in this figure could cast question marks over the “safe haven” status of the pound. The next key level in cable is around 1.6170, the high from October/November last year, and yesterday’s failure of the pair to break through this level indicates that the move higher could be running out of momentum, and with global events likely to keep risk sentiment subdued we could well see a selloff in cable in the short term.

From the US today we have consumer confidence and housing data due for release, the results of which will certainly be noted by the Fed ahead of tomorrow’s much anticipated FOMC meeting. GBP/USD opens this morning at 1.6149.

We expect a range today in the GBP/USD rate of 1.6090 to 1.6180

Euro

Market focus continued to be transfixed on events in Europe on Monday, in particular the political struggles facing some of the core

European nations as the Dutch Prime Minister and cabinet resigned after failing to come to an agreement surrounding the nation’s budget deficit. The economic health of the currency union was once again called into question on the day as the Eurozone flash PMI’s came in well below market expectations and French business confidence and Italian consumer sentiment also came in soft. Unsurprisingly, as Spanish yields traded back above 6% and European equity indices were battered the euro came under pressure against both the USD and in particular GBP, with GBP/EUR trading to a 20-month high of 1.2271.

The strong performance of GBP/EUR continued to be underpinned by the relative safety of the UK currency versus the 17-nation currency, and the added political uncertainty in France and the Netherlands only served to buoy the pound further. UK PSNB will be of some focus this morning and we have no major economic releases from Europe to look forward to but today’s Dutch bond auction will be of some interest for investors in light of recent events. GBP/EUR opens this morning at 1.2254.

We expect a range today in the GBP/EUR rate of 1.2190 to 1.2280

Australian Dollar and New Zealand Dollar

The AUD and NZD traded lower against the USD on Monday, with both currencies falling prey to widespread risk aversion as worries surrounding Europe and China sapped investor demand for the higher yielding currencies.

AUD/USD traded to a low of 1.0269 and NZD/USD fell to 0.8085 during late afternoon trading as equities broke lower. The weakness in the commodity currencies enabled the GBP/antipodean crosses to continue their upward moves on Monday, with GBP/AUD trading to a high of 1.5671 and GBP/NZD hitting a high of 1.9891.

Gains in GBP/AUD have continued overnight on the back of the weaker than expected Australian inflation number which sent AUD/USD tumbling lower on expectations that the RBA will cut interest rates at their policy meeting next week. Added to the broad risk off feel that the markets currently have it could be a tough day ahead for the AUD. GBP/AUD and GBP/NZD open this morning at 1.5686 and 1.9852 respectively.

We expect a range today in the GBP/AUD rate of 1.5550 to 1.5750

We expect a range today in the GBP/NZD rate of 1.9750 to 1.9910

Data Releases

AUD: No data due

EUR: No data due

GBP: Public Sector Net Borrowing

NZD: No data due

USD: Consumer Confidence, New Home Sales, Case-Shiller House Price Index

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