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Forex: GBP/USD ends year with a gain of less than 50 pips

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FXstreet.com (Córdoba) – The GBP/USD finished 2011 practically unchanged from the price it opened in January. Cable rose during the first half of the year and peaked at 1.6747 in April. But the European crisis and fears of a global economic contraction strengthened the US Dollar and the pair turned to the downside.

The decline accelerated in September and the pair bottomed in October at 1.5268, the lowest level since July 2010.

In the last quarter, the Pound recovered ground and even rose momentarily above 1.6000 but it failed to hold and retreated, to end the year around 1.5500/30, with an yearly gain of less than 50 pips.

USD

The dollar fell after risk appetite recovered and riskier assets climbed following news that Spanish policy-makers had announced further austerity cuts. The cuts came after figures were released showing that Spain’s budget deficit had fallen to -8.0% of GDP in 2011 but had failed to meet its -6.0% target. More austerity policies were required to help meet the target next year. Market reacted to the general improvement on the -9.2% 2010 figure and the positive approach of the new government. Meanwhile Chinese data had little impact as it showed a slight rise in HSBC Manufacturing PMI to 48.7 vs 47.7 previous; and Business Conditions Survey fell to 52.78. Next week’s data highlight’s include the Minutes from the Dec FOMC meeting and ISM Manufacturing on Tuesday and NFP’s on Friday.

EUR

 The euro started the day range-bound but a rally in riskier assets latter on led it to rise back up towards the 1.2980s. One possible catalyst may have been news from Spain that it was implementing further austerity cuts, including higher taxes and pay freezes for public workers as well as a freeze on the minimum wage. Also revealed were its deficit figures which, whilst not on target, nevertheless showed an ongoing improvement compared to 2010′s -9.2% of GDP, this year’s came in at -8.0%. This may have helped the euro recover after yesterday’s disappointing bond sale which showed investors lacked confidence in the longer-term outlook for the region. Figures today may have suggested the opposite – that with time the outlook could improve. On the data front the Italian Producer Prices Index YoY rose to 4.5% vs 4.4% estimates and MoM rose by 0.2% vs 0.1% expected.

GBP

The pound made a rapid a sudden recovery on Friday afternoon as risk appetite returned and market participants once again bought into risk. The rise was put down to slow but nevertheless persistent progress in Spain – one of most vulnerable and yet largest of the euro-zone nations still to not have received a bailout. Its budget deficit fell to -8.0% in 2011 compared to -9.2% in 2010 despite not hitting the -6.0% target. Further tax hikes and pay freezes were part of a package announced by the government to reduce it further. The pound had been falling heavily on exposure to European debt woes and its own low growth expectations, as well as speculation of increased quantitative easing going into 2012. Data out failed to ease the low growth fears as Nationwide House Prices fell by -0.2% MoM versus 0.0% expected and BOE Housing Equity Withdrawals fell yet again to -8.6bn vs -7.3bn expected and -9.1nbn previous.

JPY

The yen rose strongly on overall risk aversion and held its gains much better than the dollar did in the afternoon after risk appetite made a rebound. Against the U.S Dollar the yen fell to the 76s and it made 11-year lows versus the euro which fell below the psychologically significant 100 level. Exporter’s repatriation of funds was seen as one factor whilst another was the lessening of the likelihood of intervention after criticisms from the U.S Federal Reserve recently of Japan’s solo-interventions. It is also less likely now that there will be another joint intervention effort by the whole of the G7 as happened in March after the Tsunami after the criticisms which have strained relations. A slew of poor data earlier in the week was thought to put pressure on the yen but it has rebounded remarkably as markets have yet again shown that risk trends out-do all other factors.