Daily Insight - the Pound soared to the highest level since January against the U.S Dollar

GBPEUR/GBPUSD
Following on from last week, the Pound soared to the highest level since January against the U.S Dollar, rising to a high of $1.6270 in London, approaching the Fibonacci resistance level around $1.6340. The Bank of England declined to follow the Federal Reserve's lead and kept its emergency bond-purchasing program unchanged at £200 billion.
The nine member monetary policy committee, led by the governor Mervyn King, decided that additional stimulus wasn't required at this time, as the UK economy grew at twice the rate expected in third quarter. However, the GDP figures have been treated as one last hurrah before the real slowdown begins, as many of the key sectors in the economy continue to decline.
The decision from the Bank of England was widely anticipated but the Pound also gained ground against the majors, as a report from Halifax Plc showed that UK house prices rose by more than expected in September. The Pound was up 1.1% against the U.S Dollar, while the UK currency also bounced back above 1.15 versus the Euro, after house prices erased half of the record drop posted the previous month.
The government's austerity measures may hamper consumer spending over the coming months and send the economy into a second recession, which may prompt the BoE to extend bond purchases in the first quarter of 2011. The UK currency continued to make gains against the majority of the 16 most actively traded currencies, but continues to struggle against the so-called commodity currencies, as risk appetite remains an important factor.
Since the unexpectedly buoyant third quarter GDP numbers, the Pound has appreciated 2.5% against the Dollar and 1.6% versus the Japanese Yen. The resilience in the UK economy has been somewhat of a surprise to investors, who have trimmed bets that the Central Bank will increase quantitative easing measures at all from the current level.
According to analysts at CMC Markets, the Pound may climb to yet another nine-month high against the U.S Dollar. The Dollar is under renewed selling pressure, after the Federal Reserve announced that it will buy $600 billion of Treasuries through June 2011 in a bid to reduce unemployment and boost consumer price growth.
The Pound rallied to a high of $1.6298 against the U.S Dollar on Friday, while the UK currency also breached above 1.15 versus the Euro, amid speculation that the UK economic recovery remains on track and the Bank of England's decision not to engage in further quantitative easing. The Dollar actually bounced back towards $1.40 versus the Euro, after trading close to a nine month low.
The UK producer price data was stronger-than-expected, which provided a degree of support to the Pound on likely expectations that inflation could be very slow to fall. To that end, the Bank of England inflation report will be watched closely this week for any further evidence on the Bank's forecasts, as these may have an important influence on monetary policy expectations.
Underlying confidence in the UK currency has remained firm, contributed to by a lack of confidence in the Dollar and the Euro. The Pound retreated against the Dollar over the weekend, as the U.S currency advanced on risk sentiment.
The focus this week, aside from the BoE quarterly inflation report, will be September's industrial production report, which is expected to show sustained growth in the manufacturing sector. Elsewhere, the RICS house price survey will be watched closely for further confirmation of a slowdown in the housing sector, while the BRC retail sales report and consumer confidence survey should provide some insight into consumer spending.
EUR/USD
The U.S Dollar recorded another weekly decline against the majors, as gains in global stock markets and speculation that the worldwide economic recovery is gathering momentum reduced demand for the U.S currency as a haven. The greenback traded close to a nine month low against the Euro on Friday and the Pound before the Non-Farm payrolls report.
The Dollar traded at $1.4201 against the Euro, after trading at $1.4282, the weakest level since January 20th. The Dollar has lost 1.7% in value against the Euro this week alone. U.S payrolls rose by more than expected in October, climbing 151,000 after a revised drop of 41,000 the previous month. Private payrolls also gained more than forecast, while the unemployment rate held steady at 9.6%.
The Dollar strengthened against the majority of the 16 most actively traded currencies and Treasuries declined, as gains in average earnings added to the optimism that the improvement in labour market conditions will help boost consumer spending and get the recovery back on track. This U.S Dollar has been declining heavily against the Euro and the Pound and Friday's data may spark a bit of speculation that the greenback is becoming oversold at these levels and a correction may be forthcoming.