Yesterday’ sudden rally in the euro and the pound took the market by surprise as the dollar was expected to continue to strengthen. However, normal service has been resumed today with cable falling heavily in the light of slowing house prices, lower mortgage approvals and a sense of perplexity at the BOE of what to do next. Under normal circumstances the market would expect higher interest rates to counter the rise in both consumer and producer prices. However, with a slowing economy, the threat of recession and having signalled the need for rate cuts the Bank’s hands are well and truly tied.
The carry trades pairs too made significant gains. These gains are much more easily explained as the Dow had a good day gaining over 300 points. There is a strong positive correlation between rising stock markets and the carry trade pairs, as the appetite for risk returns. Wall Street too may be anticipating a further interest rate cut from the Fed in December. However, data due for release today, including Gross Domestic Product (GDP) may prevent this from happening as the forecast is for an upward revision to the 3.9% figure given earlier. A rising trend in GDP is always viewed favourably by foreign investors and can have a large impact on the demand for the nation’s currency. This is what we could expect to happen under more benign market conditions. However, it is not so clear cut and any impact this figure could have on the dollar will be mitigated by the figures for new home sales due up an hour an half later.
Japan too is reporting inflation figures and housing starts tomorrow.
In conclusion expect a roller coaster ride. These price swings are simply symptomatic of continuing uncertainty across all markets and the only thing we can be sure of is that this volatility will continue for the remainder of this year.