GBPEUR/GBPUSD

Following on from last week, the Pound rallied back above the 1.20 level against the Euro on Thursday, approaching the highest rate in 18 months, after a report from the Nationwide Building Society showed that UK house prices climbed to the highest level in almost two years. Sterling also gained to within a cent of the three week high against the U.S Dollar, as the report fuelled optimism that the economic recovery is gathering momentum.

Prudential Plc confirmed last week that the collapse of its proposed acquisition of AIG Inc’s main Asian unit will cost roughly £450 million and that the failure may also cost the Chief Executive Tidjane Thiam his job. The insurer was due to pay AIG in Dollars after raising the cash in Pounds and the UK currency had risen above $1.47 versus its U.S counterpart on speculation that the transaction was destined to fail.

In terms of economic data, the Pound was buoyed by reports that UK construction expanded in May at the fastest pace since September 2007, led by homebuilding. An index of building activity, based on a survey of purchasing managers, rose to a reading of 58.5, from 58.2 in April, as the overall improvement in the manufacturing sector continues to support the economic recovery.

The UK economy expanded 0.3% in the preliminary estimate for the first quarter, more than initially forecast, after an upward revision in manufacturing and construction. Bank of England policy makers voted unanimously to keep the £200 billion bond-purchasing program on hold last month, but reserved the right to continue quantitative easing should the recovery stall.

Elsewhere, UK mortgage approvals rose to the highest level in four months in April, as banks free up lending conditions and the conclusion of a transaction tax on home purchases for first time buyers helped improve demand. Lenders granted 49,871 loans to buy homes, compared with 49,008 in March, the highest reading since December.

The Pound has climbed 5.7% against the struggling Euro this year, amid reports that signaled the UK economic recovery is gathering momentum, while European economies falter and remain mired in the sovereign-debt crisis. Analysts at Citigroup Inc believe that the Euro may decline further against the Pound, after it closed above 1.20 on Tuesday.

The Pound briefly rose above $1.47 against the U.S Dollar on Thursday, as UK stocks rallied for the first time in three days. The FTSE 100 Index climbed, amid speculation that the U.S economic recovery is spreading, while investors also speculated that shares in BP Plc had fallen too far. BP gained for the first time in four days, as it struggled with efforts to stop the oil spill off the Gulf of Mexico.

The leak has wiped out a third off the value of BP stock since April 20th and the company is bracing itself for a huge clean up bill from the U.S government. The FTSE 100 rose 1.2% yesterday and the Pound subsequently strengthened against the Dollar, as the correlation between stock market sentiment and Sterling’s performance against the U.S currency remains intact.

By the close of trading on Friday, the Pound had recorded its second weekly gain against the Euro and the UK currency climbed to a fresh 18-month high over the weekend of 1.2132. The Pound also gained against the Dollar last week, the first advance in over a month, but the volatile swings in risk sentiment has brought the rate back down towards $1.43 this morning.

Niels Christensen, a foreign exchange strategist at Nordea Bank AB, said that “people are becoming a little more positive on the UK. We’ve had some good data and that has left sterling with a positive sentiment.” The UK currency rose 0.7% against the Euro on Friday, bringing the weekly gain to 2.9%, as concerns over the European sovereign debt crisis persists.

The focus this week will be firmly fixed on the Bank of England interest rate announcement on Thursday. The latest round of positive economic data are unlikely to result in any changes to the Bank’s judgment on the medium term outlook for growth and inflation. Consumer prices rose to 3.7% year-on-year in April, but is expected to fall back towards 2% over next year.

EUR/USD

The Euro fell below $1.20 for the first time in more than four years against the U.S Dollar on Friday, amid speculation that Europe’s sovereign debt crisis is spreading. Investors promptly flocked to the safest currencies, as stocks also tumbled. The Yen and the Dollar rose against all of the 16 most actively traded currencies, as a lower-than-forecast U.S nonfarm payrolls report fueled speculation that the U.S recovery may be slowing.

American companies hired fewer workers in May than predicted, indicating that the government still needs to support the labour market to spur the economy. Payrolls rose by 431,000, boosted by a jump in hiring of temporary census workers. The jobless rate fell to 9.7%, from 9.9% in April, and the report will be of some concern to investors.

U.S stocks plunged and Treasuries rose, as the report raised concern that the U.S economy may be susceptible to the European debt crisis. The Standard & Poor’s 500 Index dropped 3.4%, closing at the lowest level since February 8th. The Dollar rose to a high of 1.1877 against the struggling Euro, as risk aversion stalked the market and investors are already betting on a further deterioration of the single currency.

Jonathan Lewis, founding principal of Samson Capital Advisors LLC, said that “the euro is caught in a permanent, apparently unresolvable slide because of the tempo of bad news coming out of Europe. The market is so bearish on the Euro, it’s looking under any rock to find information that supports that conclusion.”

Market Analysis by Adam Solomon

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With thanks to Tom Trevorrow from TOR FX for the above article