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Currency update, September 13: sterling falls again due to economic uncertainty

Published:  13 September, 2010

Sterling fell on Friday against the US dollar and euro after uncertainty regarding the UK economy lead market analysts to recommend selling sterling.

EURO/GBP - 1.207
US$/GBP - 1.547
CHF/GBP - 1.570
CAN$/GBP - 1.596
AUS$/GBP - 1.658
ZAR/GBP - 11.055
JPY/GBP - 129.98
HKD/GBP - 12.019
NZD/GBP - 2.112
US$/EURO - 1.272
HUF/GBP - 341.22

Thursday saw the UK post a record trade deficit and then Friday's wholesale price inflation came in far weaker than expected which left many feeling that the Bank of England would not raise interest rates until well into 2011. Spending cuts were back in the spotlight as £4bn worth of welfare cuts were announced on top of the existing plans to cut the bill by £11bn. With October's spending review on the horizon, traders expect it to be a close fought race between sterling and euro as fresh concerns circulated last week over the European banking sector. Many expect sterling to end up the weaker of the two after a real autumn chill seems to have taken a grip of the data coming from the UK. There is no real data released today, with all eyes on inflation figures tomorrow.

Generally speaking, economic data coming from the Euro zone has been encouraging. Business sentiment for example has been boosted by strong demand from Asia for European exports. However, despite many analysts expecting this trend to continue, last week saw relatively disappointing figures. German factory orders showed a 2.2% month on month decline and industrial production only showed a 0.1% gain. This will be reflected in regional industrial data released tomorrow.

In the USA, the US dollar fell in overnight trade as Chinese factory data was strong - despite efforts by the Chinese government to curb the buoyant economy and avoid an asset bubble. As a result, investors felt happier taking risks and moved funds out of US dollars and into 'riskier' currencies. In addition, risk appetite was boosted by the announcement of the new Basel rules on capital adequacy. Known as 'Basel III', the rules force banks to almost treble the amount of capital they must hold on reserve in order to avoid a repeat of the financial crisis. This clarification has helped investors feel more confident about the recovery. It is a quiet day in the USA too, with retail sales data released tomorrow that is likely to have a large effect.

Elsewhere, the Japanese yen has fallen this morning following the surge in risk appetite. Demand for the traditionally safe haven currency tends to fall in a similar fashion to the US dollar as and when investors feel happy buying into riskier currency.

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