The pound continued to gain against the euro on the back of the continuing sovereign debt crisis in the euro zone but lose ground against the US dollar as data from the US continues on the upside and against the commodity driven high yielding currencies like the Australian, New Zealand and Canadian dollars and South African rand as the commodity bull market continues.
However, data from the UK has turned negative. The Bank of England reported that demand for mortgages slowed in the last quarter of 2010 with lenders predicting a further fall in the first quarter of 2011. The Bank’s quarterly Credit Trends report showed 41% of lenders forecasting falling demand in the fourth quarter of 2010, the largest fall since 2008 and almost 70% of respondents predicting mortgage applications were still falling.
Most lenders also expect demand for mortgages to drop in the first three months of 2011 because of the uncertain housing market.
The Markit/Chartered Institute of Purchasing & Supply (CIPS) Purchasing Managers’ Index (PMI) reported that activity in Britain’s largest sector, services, contracted in December against expectations, suggesting that overall economic growth slowed down significantly in the fourth quarter. Analysts had been expecting it to hold steady.
“A very disappointing end to the year in the service sector matches a similar deterioration in the construction sector,” said Markit chief economist Chris Williamson.
Markit now estimates that Britain’s GDP grew by 0.4% in the fourth quarter, against 0.7% for the third. This could spark renewed fears of a ‘double dip’ recession in the UK.
Data out of the US has been pretty upbeat so far this year, while the euro zone looks to be lagging behind, with the region’s sovereign debt crisis still rumbling on. Today’s key unemployment data from the US should add to the New Year ‘feel good’ factor in the US.
Fresh data reveals that German factory orders rose five times more than expected in November, up 5.2% from October’s 1.6%. Economists had forecast a 1% increase. But Germany continues to leave other euro zone economies behind. The European Commission’s economic sentiment indicator hit a 38-month high in December, up of to 106.2 from 105.1 a month before, though an increase in Germany was soured slightly by further falls in Spain and Greece.
Elsewhere, euro zone retail sales suffered a surprise drop of 0.8% in November. The euro has continued to come under pressure on the back of renewed sovereign debt concerns as the European Commission unveiled plans to outline ways to protect taxpayers from future banking crises.
The positive effects prompted by the agreement between China and Spain to add to its exposure of Spanish debt by around €6 billion appears to have been put to one side as the US dollar continues to remain well supported on the back of rising US treasury yields, and the prospects of economic recovery in the US.
Commentary by Tony Redondo, Senior Trader at Torfx.
“Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.”
