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Currency update June 21: sterling starts the day strongly

Published:  21 June, 2010

Currency analysis update, June 21 from Smart Currency Exchange: sterling has started the day strongly, rising to a five week high against the US dollar of $1.4925/ £1 in early trading.

Currency Rates, June 21, AM:

EURO/GBP - 1.197
US$/GBP - 1.487
CHF/GBP - 1.643
CAN$/GBP - 1.512
AUS$/GBP - 1.682
ZAR/GBP - 11.054
JPY/GBP - 135.14
HKD/GBP - 11.556
NZD/GBP - 2.083
HUF/GBP - 333.04

The pound's strength comes off the back of strong movement in sterling's favour on Friday, as data showed that the UK's budget deficit was lower than expected.

The UK's borrowing is still expected to hit 11% of GDP in the coming year, and the main event on the calendar this week is tomorrow's emergency Budget which is expected to deliver tough spending cuts and tax hikes.

Today's strength against the US dollar is linked to risk appetite, and many analysts are concerned that there is too much faith in the pound (which has strengthened by over 2% against the US dollar in the last month). 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.

Get in touch now to take advantage of current prices, as we could see the pound return towards $1.40/£1 once the markets have had enough time to digest the budget.

In the eurozone, the single currency had a strong end to the week as concerns eased over sovereign debt problems following stronger than expected demand for Spanish bonds. In addition, there were announcements over bank 'stress-testing' that boosted confidence across the region.

There is no data out today, but later in the week, there is PMI data that should give a good idea of the direction of industrial production. Call in now for a live exchange rate - especially if you have euros to move into sterling or US dollars, as the euro is higher than it was last week.

In the USA, so far this morning, the US dollar has fallen by 0.3% and 0.4% against the euro and pound on risk appetite as the People's Bank of China announced overnight that it would proceed with reform of the exchange rate 'Peg' (i.e. fixed rate) between the Chinese yuan and US dollar.

The Peg has been blamed for artificially maintaining a weak Chinese currency that has drawn manufacturing demand away from the USA. With the Chinese economy at risk of ballooning out of control, this could be the first step to cool demand - allowing the exchange rate to strengthen, and effectively increase the prices on goods, without using interest rates.

Elsewhere, new car sales in Australia fell by 3.2% in May. This was the biggest drop in over four months and was attributable to higher financing costs as a result of the central Bank's recent interest rate hikes, as this impacted on demand.

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