• Sterling boosted by strong UK data
• US Dollar supported but awaits afternoon data

Market overview

So nonentity big brother starts again and we are all supposed to be enthralled by the inanity of it all. I am proud to say I have never seen more than 20 minutes of this drivel and have managed to survive relatively intact. But if that isn’t enough to drive you insane, we still have D-list celebs dancing, singing cooking and there is always Ashes cricket if you are really desperate. The markets were getting back into trading mode yesterday with relatively good US data managing to boost the US Dollar which strengthened across the board. Today brings more US data this afternoon but it started with a rash of UK numbers to get us all going. UK mortgage approvals rose to a three year high last month and the Services Sector Purchasing Managers Index was the strongest in over nine years. The Pound, unsurprisingly rose against everything but gains against the USD were muted ahead of this afternoons flurry of US data releases.  In fact recent UK data has been so bullish that many institutions are raising their expectations for UK interest rates and many are pricing in another hike in the first Quarter of 2007. Sterling should then remain well supported but I wouldn’t put too much on it because there tends to be a sharp negative reaction whenever this perception is tested by poor data. And finally, at a time when UK employers are increasingly worried about the levels of literacy and numeracy in their young recruits, Gordon Brown wants to prioritise African Education, Lord help ‘em.

Currency - GBP - NZ $

The Pound fell sharply against the Kiwi Dollar yesterday as most currencies were battered by the US Dollar and as traders started to factor in higher interest rates in New Zealand. It looks very likely that the Reserve Bank of New Zealand will be forced to hike their base rate when they meet on 25th January in order to dampen consumer enthusiasm and that will inevitably create yet more demand for the Kiwi Dollar as international investors grab the very high returns that the Kiwi Dollar offers. In fact part of the Kiwi’s gain yesterday was driven by the launch of NZ$200 million in bonds which were snapped up by overseas investors. The GBPNZD exchange rate has bounced a little this morning though after the buoyant UK data mentioned in the main section above. However, I am still targeting NZ$2.72 in the short term and I would view this bounce as a Kiwi Dollar buying opportunity rather than the start of another move higher.

Currency - GBP - Euro

Sterling looks like it is tied to the Euro by a piece of elastic because the Pound seems to be unable to break away significantly from the Euro despite solid variance in the data from the UK and Eurozone. There wasn’t any EU data yesterday but this morning brought news that inflation within the Eurozone remained at 1.9 percent in December as measured on the ECB’s favoured HCIP calculation. This ought to remove any chance of another interest rate hike from the European Central Bank but traders are still relatively convinced that we will see higher EU interest rates before the year is over (I know it has only juts begun). As for the UK, higher interest rates become far more likely when the levels of personal debt reach unacceptable peaks and that is exactly what we are experiencing at the moment. Despite the clothing retailer Next complaining about Christmas spending levels, every other retailer appears to have been able to persuade shoppers to melt that plastic in the pursuit of this year’s must have Chrissie pressie.  Personal debt levels are alarmingly high but so are the bankruptcies and insolvencies and yet every ad on the TV is for another debt company who doesn’t appear to care whether you can repay them or not. That “one affordable monthly payment” offer is the prelude to higher UK interest rates and that is currently supporting the strength in the Pound. It will be a volatile time in the GBPEUR rate and a general downward trend is in place; Euro buyers may miss out unless they act soon.

Thought for the day

The Supreme Court has ruled that they cannot have a nativity scene in Washington, D.C. This wasn't for any religious reasons. They couldn't find three wise men and a virgin.

Jay Leno

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FX Research and Analysis undertaken by:
David Johnson - Halo Financial