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Strong moves by financial sector stocks allowed sterling to rally close to its yearly highs against the dollar yesterday whilst also posting gains against the European single currency. At the time of writing GBP/USD is sitting at 1.5345 and GBP/EUR 1.1319.

The FTSE gained around 2% and closed close on its yearly highs driven by banking shares and in particular HSBC. Citigroup continued their ‘buy’ recommendation on HSBC and moved their price target higher although they predict that the UK’s biggest bank will still have to write down a significant chunk of debt in coming years.

As we foresaw yesterday credit markets did have an impact on FX markets as yet another green shoot poked its head through the rubble of the credit crunch. The London InterBank Offered Rate or LIBOR as it is commonly known fell to record lows. This is important as it shows that trust between commercial institutions is starting to return to some semblance of normality. The TED spread, the difference between the interest rate on US treasury debt and the dollar LIBOR, also fell yesterday. Granted this may not mean much to most of you but to an economist this is an unexpected thing that makes your day that little better like finding a random £10 note in your jeans.

How this will affect sterling will have to remain to be seen. GBP finds itself in a familiar place against EUR this morning; hovering around the 1.13 mark, a mark that sterling has failed to break decisively above no less than 10 times this year. Data today could be the catalyst to make it 11 times in 2009 with CPI and RPI inflation data due at 09.30. With RPI expected to fall further into negative territory deflationary worries could tell for this sterling rally before it’s even started. Other data today includes ZEW economic sentiment from Germany (10.00) and US housing starts (13.30).

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Please feel free to contact me jeremy.cook@worldfirst.com(jeremy.cook@worldfirst.com) if you have any questions or thoughts regarding these updates or if you are interested in a particular event in the calendar. If you would like to discuss your foreign exchange requirements, please contact our: Corporate Foreign Exchange on 020 7801 9050 or ourPrivate Client Currency Exchange on 020 7801 9080. Disclaimer: The above comments are only our views and should not be construed as advice. You should act using your own information and judgement. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgement as of the date of the briefing and are subject to change without notice. Any rates given are “interbank” i.e. for amounts of £5million and thus are not indicative of rates offered by World First for smaller amounts. E&OE. Definitions of jargon/market terms can be found in our Glossary of Foreign Exchange Terms..

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