The Pound found support below 1.53 against the Dollar exchange rate and rallied through the course of the day, unable to challenge the recent three-month lows just under the 1.5250 level.
by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound slipped against the U.S Dollar exchange rate and the Yen, as global risk appetite weakened following the announcement that Standard Poor’s have cut France’s AAA credit rating and lowered grades for eight other EU nations. The move has reduced demand for commodity driven currencies and assets more sensitive to swings in global economic growth.
The UK currency was 0.5% lower against the Dollar exchange rate and close to the lowest level in 18 months and the downward move continued following reports that Ernst Young LLP’s Item Club said that the UK economy slipped into a recession during the fourth quarter. Coupled with higher unemployment and slowing inflation, the prospect of further quantitative easing from the Bank of England is increasing day-by-day.
A separate report earlier today from Rightmove Plc showed that UK home sellers slashed asking prices for a third month in January, which emphasizes the fragile nature of the housing market. The Pound is likely to fall even further against the U.S Dollar exchange rate, given the economic outlook and the U.S currency is now benefiting from positive data, as well as, swings in risk sentiment.
The Pound found support below 1.53 against the Dollar exchange rate and rallied through the course of the day, unable to challenge the recent three-month lows just under the 1.5250 level. The report from the Item Club suggesting that the UK might already be in a recession has curtailed the Pound’s momentum against the Euro exchange rate somewhat, as the ongoing debt crisis in Europe has a negative impact on business confidence.
There was also further evidence of stresses within the retail sector, as the Peacocks group was likely to go into administration, after failing to secure a fresh banking facility. The Item Group was, however, optimistic that a deep recession would be avoided. The latest consumer price data will be watched closely this morning and a sharp decline in the annual rate would increase the prospect of further quantitative easing from the Bank of England, possibly as early as next month.
The Pound may continue to derive defensive support from its position outside the Euro-zone and the UK currency is likely to gain backing from fears surrounding the Euro-zone. The Pound continued to decline against commodity driven currencies, falling 3.1% versus the New Zealand Dollar exchange rate and trading close to a record low against the Australian Dollar exchange rate.
Euro / US Dollar exchange rates
The Euro exchange rate found support in the region of 1.2620 against the U.S Dollar exchange rate yesterday and consolidated below the 1.27 level, amid relatively subdued trading conditions as U.S markets were closed for the Martin Luther King holiday. Sentiment for the Euro exchange rate remains extremely fragile following the multiple credit rating downgrades for France among others.
The political deadlock in Greece remains an important focus with debt-restructuring talks stalling on a breakdown in negotiations last week. There were increased concerns surrounding a hard Greek default, as there would be no possibility of Greece making debt payments due in March without a second rescue package.
There was also a surge in Portuguese bond yields through the course of the day, which reinforced concerns over the peripheral European economies and the levels of indebtedness. Standard Poor’s also downgraded the EFSF credit rating, which will make it more difficult to attract funding. There was technical movement in the market yesterday, with traders reluctant to embark on excessive Euro selling, particularly considering the somewhat oversold positions already held.
Today’s Exchange Rate Data
U.K 09:30 – Consumer Price Index (December) – RPI
U.K 09:30 – DCLG House Prices (November)
EU 10:00 – HICP Final (December)
GER 10:00 – ZEW Index (January)
U.S 13:30 – Empire State / NY Fed Index (January)
CAN 14:00 – BoC Interest Rate Announcement
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