by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound bounced back against the U.S Dollar yesterday, rising for the first time in four days, albeit briefly, after a report from the Office of National Statistics showed that UK unemployment claims increased by less-than-expected in August. Public sector jobs plummeted 111,000 in the three months to June but the smaller decline in jobless claims is as a result of the improvement in private-sector job growth.
The government plans to eliminate 330,000 jobs over a four year period, as part of the deficit reduction plan. The Pound lost ground for a third day against the Euro, trading back under 1.15 in what can be described as a corrective recovery from last week’s upward move to a 4-month high. Appetite for Sterling will be limited amid speculation of further quantitative easing and a contraction in growth during the third quarter.
The Bank of England kept interest rates on hold at 0.5% this month and policy makers are expected to renew the quantitative plan by November to support the economy. MPC member Adam Posen said earlier this week that the outlook for the economy had worsened and his colleagues should back his call for more stimulus measures to be introduced.
Posen indicated that he may double his recommendation for bond purchases and will intensify the debate within to the MPC to add more stimulus. He has voted for a £50 billion increase in the bond plan every month since October and said the BoE needs to buy as much as £100 billion of securities within three months or the economic outlook will worsen.
The claimant count rate was 4.9% in August and the number of people receiving unemployment benefits was 1.58 million. The UK economy barely grew in the second quarter at a revised estimate of 0.2% from the previous months and a measure of factory production, services and construction have all declined in August, making a contraction all the more likely.
The unemployment rate held steady at 7.9% despite the number of unemployed people increased by 80,000 to 2.51 million. The government is hoping that the private sector will help mitigate the drop in public sector jobs over the next four years but there is pressure on banks to cut jobs. The biggest global banks are cutting jobs at the fastest pace since 2008, as a slowing global economy hurts revenue.
The Pound found an area of support in the region of 1.57 against the U.S Dollar and rallied through the European trading session with a peak above 1.58. Underlying confidence in the UK economy will remain extremely fragile, amid fears that there would be a further deterioration in consumer confidence, while there was significant unease surrounding the banking sector.
The UK currency declined for a third straight day against the Euro, dropping back towards 1.1450 last night, after the French President Nocolas Sarkozy and German Chancellor Angela Merkel said that Greece should remain in the European Union, reducing concerns of a crisis in the region that would see Greece ejected from the Euro. The Pound may come under further selling pressure this morning with UK retail sales expected to decline in August, led by a sharp deterioration of consumer confidence over the period.
Euro / US Dollar exchange rates
The Euro rallied against the majority of its trading partners yesterday following the joint announcement from Sarkozy and Merkel. The single currency extended its gains against the Dollar, after Greece reaffirmed commitment to its budget plan following a conference call among the leaders of Germany, France and Greece.
The Euro initially found support on a drop towards 1.36 earlier in the day and underlying confidence will remain fragile given expectations that Greece would eventually default and there were further political stresses in Germany. The EU commission pledged to make additional proposals to strengthen the Euro-zone, which included the creation of Eurobonds.
There were further concerns surrounding the European financial sector as there were credit-rating downgrades for two French banks, while two banks also accessed the emergency ECB dollar funding facility. The Euro was also undermined by speculation that Italy will suffer a credit-rating downgrade and there is caution ahead of today’s Spanish bond auction.
In the U.S, the Dollar fell to a near-record low against the Yen and lost 0.6% versus the Euro, after the U.S retail sales report showed a weaker-than-expected figure for August. The focus, however, will continue to fall on stresses within the Euro-zone in the short-term and there is a host of economic reports released today in both Europe and the U.S.
Today’s Exchange Rate Data
EU – Finance Ministers / Central Bankers Meeting (Continues to Sat 17th)
EU 09:00 – ECB Monthly Bulletin Published
U.K 09:30 – Retail Sales (August)
EU 10:00 – Employment (Q2)
EU 10:00 – Final HICP (August)
U.S 13:30 – CPI (August)
U.S 13:30 – Real Earnings (August)
U.S 13:30 – Current Account (Q2)
U.S 13:30 – Empire State / NY Fed Index (September)
U.S 13:30 – Initial Jobless Claims (w/e 10th September)
U.S 14:15 – Industrial Production (August)
U.S 15:00 – Philly Fed Business Survey (September)