Geo-Political Events Threaten GBP USD Exchange Rate

Published: Monday, 24 September 2012 09:00 BST - Written by Tim Boyer

STORY LINK Geo-Political Events Threaten GBP USD Exchange Rate

After a strong performance for global stock indices following the ECB’s bond purchase announcement and the Fed’s QE3 revelation of earlier this month, a raft of ‘bad news’ stories are now looming on the horizon, threatening to drain appetite for risk from the market place.

Disappointingly weak trade figures released in the world’s three major economies – the US, China and Japan – in recent weeks have had the effect of emphasising the softening of aggregate demand in each of the triumvirate’s domestic economies. Perhaps more worryingly, they have also pointed to a generalised weakening of global export markets, hinting that the global economic system as a whole is cooling down.

History has shown us that straightened economic times often provide a fertile breeding ground for political and socio-political tensions and the current global situation provides an exemplar of this. Mass protests against Japanese companies and interests were reported in 300 Chinese cities last week as Sino-Japanese tensions grew over the sovereignty of three strategically significant islands in the South China Sea. Japanese Prime Minister Yoshihiko Noda has upped the ante in the last few hours by warning China’s leaders that last week’s violent protests raised the spectre that China’s trading partners would issue retaliatory economic sanctions by way of retribution. Last week’s announcement by US President Barack Obama that he had reported China to the World Trade Organisation for making ‘unfair’ payments of subsidies to companies in its car industry added to the intrigue.

Looking ahead to this week’s scheduled risk events of note, the next potential banana skin comes in the form of tomorrow afternoon’s US Consumer Confidence survey for this month. The data is expected to show an amelioration in the mood of US economic participants since last month. A print of above the anticipated 63.2 level would strengthen the current ‘risk-on’ trading environment. Any less than this, in combination with more bad news from China and Japan, could see a renewed wave of safe haven support for the Greenback. The losers in such a scenario would be the high-yielders, meaning that the GBP AUD and GBP NZD exchange rates could make gains.

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