by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound declined against the Euro exchange rate yesterday and rose an incredible 9% against the Swiss Franc in early trading, following speculation that the Swiss National Bank will intervene and take action to curb the currency’s recent strength. Consumer price growth in Switzerland rose at the slowest pace in almost a year and the Swiss Franc declined heavily following five consecutive days of gains.
Policy makers have devalued the Franc by as much as 16% against the Euro since early August and the SNB announced yesterday that it had foreign currency holdings of 253.35 billion Francs, as a result of the move to weaken the currency. Speculation that the SNB will peg the Franc against the Euro temporarily has strengthened the single currency and the Pound traded back towards 1.13, before recovering through the course of the day.
The Pound staged a brief rally against the U.S Dollar yesterday morning but Sterling was quickly subjected to fresh selling pressure from highs around 1.6150. The UK currency plunged to a fresh seven-week low, breaching the 1.60 level to trade as low as 1.5935 by the close of trading last night. The Pound was again undermined by a decline in risk appetite and gained little support as a safe haven.
Following the weak reports on UK manufacturing and services sector growth over the past week, the Pound was also weakened by speculation that the Bank of England would take additional action to support the economy through quantitative easing. There were also suggestions that the government would need to adjust fiscal policy if growth conditions continued to deteriorate.
A report from the British Retail Consortium showed that retail sales dropped in August, as the worst civil unrest in 30-years meant consumer confidence plummeted. Sales at stores open at least 12-months fell 0.6% from a year earlier, fuelling speculation that additional stimulus measures will be required. The Bank of England announcement will take on added significance and the Pound is likely to weaken, amid speculation that policy makers will move this month.
The Pound has weakened 6% against the majors in the past 12-months and only the Dollar has weakened more, depreciating 9.7%. The focus this morning will fall on the UK industrial production data and the report is expected to show that output at factories declined in the latest monthly figures, fuelling concerns about the sustainability of the economic recovery.
Euro / US Dollar exchange rates
The U.S Dollar declined against the Euro for the first time in six days this morning, as gains in Asian stocks overnight dampened demand for the U.S currency as a safe haven. The Dollar declined against the majority of the 16 most actively traded currencies, before a speech by the Chicago Fed President Charles Evans and the release of the Beige Book survey on economic conditions.
The Euro rose sharply earlier in the day following reports that the Swiss National Bank will take further steps to weaken the Franc. However, there is still a key lack of confidence in the Euro-zone, which undermined the single currency later in the day. The German constitutional court will make a ruling on the legality of German bailout payments today and there will be some concern that any judgment would make it more difficult for the government to secure approval for an expansion of the EFSF.
There was further uncertainty surrounding Greece yesterday with the German Finance Minister stating that the next loan tranche to the struggling peripheral nation could not be paid unless there was favourable report on Greece’s progress from the IMF. Fears over a deterioration in growth conditions would tend to put further pressure on the Euro with banking sector shares falling sharply, amid speculation that the ECB will adopt a more dovish stance on Thursday.
Today’s Exchange Rate Data
U.K 09:30 – Industrial Production (July) – Manufacturing Production
GER 11:00 – Industrial Production (July)
CAN 14:00 – BoC Rate Announcement
U.K 15:00 – NIESR GDP Estimate (3 Mths to August)
U.S 20:00 – Federal Reserve Beige Book