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Risk trades shelved for now..

A quick look at yesterday’s movements in the markets saw sterling maintain its trade weighted highs following better than expected CPI data- against the euro we peaked at 1.1860 and recovered against the USD from 1.62 to 1.65 before US data turned the trend. EUR/USD also edged back to 1.39 as the USD was sold off following its previous day gains. Recently we are seeing a market torn between risk appetite and risk aversion- this is dominating the currency markets with flows in and out of the USD and YEN still dictating. Looking at data from the US we saw that housing starts jumped 17.2% to 532,000 new units from Aprils low of 454,000- a good number but still 45.2% down on last year, at the same time we saw Industrial Production fall 1.1% in May from April which was worse than expected and suggests that the economy is still struggling to pull through its recessionary period. The mixed data led to a pull back in the markets as the USD gained on the weaker Industrial Production data. Focusing on sterling this morning we have already seen unemployment data and the Bank Of England minutes. The unemployment data came in better than expected at +39.3k in May against a forecast of +60k. The BoE minutes showed a vote of 9-0 to keep rates at 0.5% and to maintain the current level of 125 billion on Quantitative Easing. The BoE pointed out that the rise in sterling could reduce net trade and CPI pressures in the short term and credit supply remained constrained- on the back of this sterling has made a swift u-turn from the initial rally on the data and is now dipping against the USD, EURO and YEN. The news that British Airways are asking 40,000 of its staff to work for free for 1 month is also a stark reminder of the tough conditions in the UK economy and does not help sterling’s cause. Onto the BRIC meeting and the political leaders said they wanted to take a larger role in the world financial system- especially as their foreign reserves grow. The BRIC leaders are divided between supporting the US dollar- as it is the only choice for now and advancing the march for an alternative. The meeting has not had a direct impact on the markets but will affect future sentiment on the USD. Yesterday we saw a good ZEW report from Germany which identified both better sentiment and improved current conditions. This is indeed a surprise following sharp contraction and rising unemployment in Germany. Later look out for the UK Chancellor making probably his most important speech in recent times at the Mansion House dinner. Within his address, he is expected to say that he will not alter the UK's regulatory regime between the BoE, Treasury and FSA. Also, the US President, Barack Obama, will reveal plans for a system of financial regulation that gives the Federal Reserve primary responsibility for averting and mitigating future financial crises.

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