USD Long Futures at a high as George woes high earners back to the UK

Week Commencing Monday 19th March 2012

Overriding Market Themes:

‘It’s been over 12 years since currency traders have been so bullish on the Dollar’ according to our Bloomberg session and this continues to run with our theme that the US is spearheading global economic growth. The number of futures contracts being written anticipating a stronger dollar (against its majors) has outstripped those predicting a drop for 26 consecutive weeks. With the US steaming ahead growth wise and growing consumer spending, it is hard to think what can derail them at this point.

Back on more gloomy soil, it seems that the Chancellor may have worked some magic over in China. During his ‘trade mission’ to the world’s second biggest economy, George pushed to make London the offshore financial hub of Yuan denominated trade. As it stands, Hong Kong is the only offshore centre for Yuan trading, and London looks set to be the first, and if not the only Yuan trading centre in the west. This should be good for UK financial institutions, as well as for the city which desperately needs to assert its strength against other big European centres such as Frankfurt and Paris.

Friday saw something of a relief rally in the Euro as investors holding euro-denominated assets took advantage of the IMF giving its approval to 28 billion euros of bailout funding to Greece. It was generally a good day for the Euro, with the ECB monthly report adding using more words like ‘stabilisation’ rather that ‘contagion’. The report went on to suggest that recent Eurozone data releases have indicated a firming of the regions real economy, a statement backed up by the zones unemployment data, which fell 0.2% in the last quarter of 2011.

GBP This Week:

All eyes are on the UK CPI release on Tuesday morning, with expectations of a slight reduction from 3.6% to 3.3%. Also, we await to read the Bank of England minutes on Wednesday as well as George Osborne’s budget. We don’t expect to see anything too controversial in the BoE report, but it will be interesting to see how George’s budget gets off, and whether he will include tax breaks for the UK’s lowest earners as well as for the highest. Thursday sees the release of our retail sales figure, which we are expecting to post higher than previously thought. Finally, Friday sees Nationwide post their consumer confidence report, which we expect to flat line versus their previous report at 47, indicating a slightly bearish outlook for the economy in the medium term.

We are still negative GBP, despite the gains in GBP/EUR we saw last week. Fundamentally it is hard to see how Sterling can continue to gain against its peers, especially the euro, which investors view as considerably undervalued at this point. The Budget release will be the most likely to set direction on Wednesday, so expect some significant volatility around lunchtime.

USD This Week:

We have a reasonably quiet week for the US Dollar, with all releases of importance surrounding the property sector. We expect to continue to see some slight improvements in the US housing sector for the first quarter of 2012, with the number of approvals and sales marginally up.

We do expect to continue to see USD strength dominate the currency markets, perhaps with the exception of EUR/USD as Europe continued to find its footing.

EUR This Week:

German Produce Prices is the highlight of the week, with the Tuesday morning release set to show a marginal decline in prices in February. Eurozone PMI releases on Thursday will continue to stoke the bulls as they show a small but nevertheless impressive growth in the manufacturing sector, which let us not forget contributed to roughly a quarter of total Eurozone gross domestic product.

Apart from these releases, we have a reasonably quiet week across the channel. We expect some further advances in the Euro as investors continue to plough the market for cheap assets or high yielding government bonds.

In Other News:

Apparently, the UK is the most internet based major economy, a new study has revealed. The internet contributes 8.3% of the UK Economy, which equates to a staggering 121 billion pounds in 2011. This also directly ties in with the view that some of the poorer regions of England will drive economic growth. The North East, Yorkshire and the Humber all have been found to have the highest proportion of fast growing, export focused businesses. Needless to say, our field sales man hasn’t heard to news of his impending move to Newcastle, but the Luton is packed and ready to depart after breakfast. 


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