The UK markets reopened after the bank holiday weekend and with no major data releases at the start of the week Sterling was driven by events from the States and Euro zone as everyone awaited Ben Bernanke’s speech on Friday.
Increased optimism around the Euro zone saw investors move from the safe-haven of the dollar as the Euro gained ground. We did have some good news out of the States as revisions showed that the economy had slowed less than previously estimated (1.7% up from 1.5%). The US is in much better shape than Europe and the UK but the next couple of weeks will determine in which way the rates will move and be affected.
If the Euro crisis continues as many expect; we could see more uncertainty as investors will instinctively move back into the safe haven of the dollar and we could see GBP/USD rates in the 1.54’s and EUR/USD rates back into the low 1.20’s. Sterling dropped against the dollar on Thursday as investors awaited the speech by Federal Reserve Chairman Ben Bernanke.
Bernanke spoke at Jackson Hole on Friday; his comments were to determine the value of the dollar and ultimately whether we were seeing a positive or negative trend for the US Economy. Bernanke stated that “the first two rounds of Fed asset purchases had raised US output by almost 3% and lifted employment by 2m jobs and thus wasn’t going to rule out further asset purchasing. The Fed chairman also urged Europe to press ahead with policy initiatives to resolve the ongoing crisis. Markets remained relatively unchanged as Bernanke said the “Fed would act as necessary to strengthen the struggling global economy, but there was no suggestion that action was imminent” halting speculation of more Quantitative Easing (QE).
September is notorious for being very volatile and no doubt this month will not disappoint, all eyes will be on the single currency and whether the ECB and German courts can wave through a realistic and convincing EU rescue plan, which could see EUR/USD rates back towards 1.30 and GBP/USD rates up near the 1.60 mark. With the Bank of England meeting due to take place next week all eyes will again be focused on Mervyn King and we will wait to see if there is any talk of another interest rate cut for the UK.
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