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Posted May 28th, 2010 by Charles Purdy

EURO/GBP – 1.175
US$/GBP – 1.452
CHF/GBP – 1.674
CAN$/GBP – 1.526
AUS$/GBP – 1.702

Its all about risk at the moment and whether you are risk adverse or you have risk appetite. Last week was definitely a week where risk aversion was to the fore and the US$ given its safe haven status in the ascendancy. The second half of this week has seen risk appetite return. The result of this was that we have seen sterling appreciate even though the economic data has been less than supportive for sterling. Yesterday we had retail sales for May released which were below expectations and the poorest for a while. Bad weather was given as the reason but you are left to wonder if there is a different underlying problem. So even though we hit 1.18 interbank yesterday there is no conviction that sterling will keep on going or suddenly go into fast reverse. Volatility continues to high, movements somewhat random and when they happen quick and large so that is why it is so important to get in touch now.

The euro benefitted from both the Chinese and the South Koreans saying that they still viewed the euro as a key constituent in their foreign currency reserves. This was good news as the markets were worried about a change in tack. To be honest what choice do they have? The US$ may be viewed as a safe haven asset but when you have so many of them the last thing you probably want is more of them. So debt problems continue to loom large in the euro zone and these problems are not going to go away for quite a while.

The US$ continues to be the least ugly of the ugly sisters and somehow convincing the market it is a safe haven asset. We have seen sterling gain some ground on increased risk appetite pulling back to over US$1.45/£1 first thing this morning but the market is still believing that sterling will weaken further. And the US does seem to be ahead of the curve with economic data being broadly positive. So don’t miss out on short term buying opportunities and give us a call now.

With increased risk appetite we have seen the commodity backed currencies regain some of their losses of last week but given the change in sentiment in China and their intention to dampen growth and the UK government starting to attack costs, are we about to see a change in sentiment. As such I am watching the movement in currencies like the Australian $ closely and wondering if we will see a return to trend with it strengthening against sterling or have we actually seeing a reversal of the longer term trend.

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