Published: Tue, 17 Feb 2009 21:35:13 +0100

Pound Shows Modest Strength Despite Rising Risk Aversion

(CEP News) - The pound is under pressure but holding up better than its counterparts against safe haven currencies like the U.S. dollar and Japanese yen.

The pound is mixed, trading down against the U.S. dollar, but trading up against the Canadian dollar, the euro and the Japanese yen.

GBP/USD traded in a two-cent range today against the U.S. dollar, hitting a session high of 1.4312 USD and a low of 1.4125 USD. The cross appears to be stuck in the middle of the range at 1.4263 USD. The big move has been against the euro. EUR/GBP has been under pressure all day and is down 0.1131 to 0.88420 GBP.

The market has shrugged off UK data on Tuesday. Inflation in the UK surprised to the upside at 3.0% in January, but still fell to its lowest level since April 2008, according to the Office for National Statistics. Economists had expected a rate of 2.7%, down 0.4 percentage points from December's figure.

Richard Franulovich, currency strategist at Westpac, said today's moves in the currency markets had less to do with pound strength and more to do with euro weakness. The euro dropped sharply today following a report by Moody's warning that western European banks face downgrades due to significant exposure to financial problems in eastern Europe.

Franulovich said he doesn't have a strong outlook for the cross. Although he expects the sterling to outperform the euro, it is not a trade that he recommends.

Matthew Strauss, senior currency strategist at RBC Capital Markets, is more optimistic about the pound and suggests shorting EUR/GBP.

"We've seen very aggressive selling in the sterling across the board and we think at this point it is undervalued. Most of the bad news has been priced into the UK economy," he said. "We still see major downside risk for the European economy."

The minutes from the February Bank of England MPC meeting could pose a risk to the pound on Wednesday. The minutes will come after the release of the quarterly inflation report. Strategists are expecting the minutes to reflect talk from the members about quantitative easing measures.

Euro/USD down 1.78 cents to 1.2625

USD/CAD up 1.80 cents to 1.2606

USD/Yen up 0.78 points to 92.51

GBP/USD down 0.19 cents to 1.4280

AUD/USD down 1.11 cents to 0.6392

Euro/Yen down 0.66 points to 116.79

Euro/GBP down 1.14 pence to 0.8841

GBP/CAD up 2.24 cents to 1.7991

CAD/Yen down 0.46 points to 73.37

The U.S. Dollar Index is up 0.92 points to 87.58

All data taken at 3:30 p.m. EST.

By Neils Christensen, neilsc@economicnews.ca, edited by Sarah Sussman, ssussman@economicnews.ca