Forex Investment and Currency Trading

Sterling has been the under performer during the broader correction lower of pro-cyclical and commodity currencies against the USD in early European trading Friday, as the market interpreted that comments from US officials as being on the hawkish side. While the pullback in the EURUSD and AUDUSD is likely to provide renewed buying opportunities, GBPUSD is expected to resume its downtrend as the underlying negative picture in the UK is once again exposed.

The overnight speeches from US officials, including Bernanke and Summers, seemed to stress that an exit from super expansionary monetary strategies might have to occur early in order to avoid inflation from picking up. These comments will have a short term currency impact.

An early monetary tightening while fiscal policy stays accommodative would pave the way for a downgrade of sovereign debt which would be disastrous for a country with a reserve currency status. The hawkish comments are seen as designed to keep inflation expectations anchored and long-term government bond yields low, which is essential for the hoped stabilisation in the housing market. Re-mortgaging needs will stay high over the next couple of years and a rise of bond yields during this period of time could move housing back into recession. The support the USD receives via the current rate discussion is going to be limited at best. Meanwhile, the BOK has left rates unchanged and has again intervened in the FX markets selling KRW for USD’s. Asian currencies have remained bid and equity markets have continued to rally despite the hawkish noise delivered from the US, suggesting that emerging market inflows have remained strong.