by Adam Solomon
Sterling / Euro and US Dollar
Following from last week, the Pound declined against the Euro falling back towards 1.1470 in early trading on Thursday, while the UK currency also lost ground versus the higher-yielding currencies, amid a mini-revival in risk appetite. Asian stocks and commodities bounced back from the mid-week slump, but the Pound came under pressure, after an index of sales volumes at UK consumer-services companies plummeted to the lowest level since November 2009.
The report from the Confederation of British Industry will make it even more difficult for the Bank of England to raise interest rates at this stage of the fragile economic recovery because of the potential impact it would have on consumer confidence. Nonetheless, the Pound took advantage of broad Dollar weakness, rising up towards 1.6350, after a report in the U.S showed that the economy expanded just 1.8% year-on-year in the first quarter, and the Pound extended those gains over the Bank Holiday.
The revised estimate of U.S GDP fell short of initial expectations, reflecting the modest gain in consumer spending. The Dollar also lost ground versus the Euro and the downward move was exacerbated by the weekly labour market data, which showed that claims for unemployment benefits surged by 10,000 in the last week.
The Pound also bounced back against the Euro on Friday, rising back through 1.15, despite comments from the ECB chairman Jean-Claude Trichet, who gave a strong indication that policy makers are focusing on inflation with the possible inclination to raise rates in July. The UK currency continued its upward surge against the Euro, peaking just above 1.16 and the highest level for eleven weeks.
An EU policy maker said that the International Monetary Fund may not grant Greece additional aid, which helped boost the appeal of the Pound and diversification away from the Euro. Jean-Claude Juncker, who leads the group EU finance ministers, said in a conference on Thursday that “there are specific IMF rules and one of those rules says that IMF can only take action when the refinancing guarantee is given over 12-months.”
The Pound strengthened towards 1.6550 against the U.S Dollar over the weekend, rising for the fourth consecutive day, amid reports that showed UK consumer confidence rose by the most in 18-years. The Gfk gauge of sentiment rose 10 points to minus 21 in May, the highest level in five months and probably reflects the increase in spending during the April Bank Holidays and Royal Wedding.
A separate report from the Nationwide Building Society showed that UK house prices increased by more-than-expected this month, rising 0.3%. The Pound also remained in the ascendancy versus a basket of currencies, including the Canadian Dollar, after breaking through strong resistance at 1.60 to trade at the highest level since March.
The positive tone of the data will add to the debate on when the Bank of England will begin raising interest rates. It is widely believed that policy makers will at least wait until the end of the year or the beginning of 2012 before increasing the benchmark lending rate. An increase now would jeopardise the already fragile economic recovery and risk another contraction.
BoE policy maker and staunch hawk Andrew Sentance will leave the panel today, reducing the number of officials that have voted for an immediate rate increase. The contrasting opinion within the MPC was perfectly illustrated last week, as BoE member Tucker said he was concerned about inflation and his comments suggested that he may switch to a tightening bias at the June meeting. In contrast, Adam Posen warned that raising rates now would the wrong move given the tight fiscal policy.
Concerns surrounding the UK banking sector will remain a significant factor, after the Business Secretary Vince Cable warned that further shocks in the system are ahead. Weakness in other economies has helped curb selling pressure for Sterling, as the UK currency surged higher versus the U.S Dollar and the Euro.
However, the Pound declined against the Euro towards the close of trading on Friday, after the consumer confidence and house price reports. The positive results of the data released on Friday probably won’t be enough to quell fears about the UK economic outlook or convince the Bank of England that the fragile nature of the recovery would be able to incorporate higher interest rates.
After rising to a high of 1.16 against the Euro on Thursday, the Pound lost 0.7% by midday in London and also lost ground versus 12 out of the 16 most actively traded currencies. The Pound is still trading higher versus the U.S Dollar but Euro buyers may wish to take advantage of the current rate, or at least consider using a stop order to protect against a key reversal.
There is a distinct lack of first tier economic data released in the UK this week and the Pound may therefore benefit from any negative data derailing its recent surge versus the Dollar. Although, the CIPS manufacturing and services PMI will feature and offer some insight into the pace of economic activity in the second quarter.
The Pound is currently trading at the strongest level against the U.S Dollar in almost four weeks, after a report showed that property prices for luxury homes in Central London rose at the fastest pace in a year this month. The UK currency has risen against the Dollar for five out of the last six trading days, but the Pound slipped against the Euro, after a separate report from Lloyds showed that its economic optimism indicator dropped.
Euro / US Dollar
The U.S Dollar declined against the Euro last week, after the GDP data showed that the economy grew by less-than-expected in the first quarter. Elsewhere, jobless claims also increased to 424,000 in the latest weekly data, undermining the Dollar and raising concern that the labour market is struggling. The Euro initially pushed higher towards 1.42 on speculation of Chinese demand for European bonds, but the upward momentum was short-lived.
The structural vulnerabilities within the Euro-zone continue to hamper sentiment and the single currency fell sharply after Juncker’s comment. Given Greece’s short-term need to stave off the threat of default, such action by the EU would compound fears that the struggling nation would fail to meet its deficit reduction targets.
The European Central Bank has continued to warn over the consequences of restructuring Greece’s debt and the Euro fell sharply below 1.4080 towards the close of trading last night. Underlying support for both currencies remains weak but the Dollar came under fresh selling pressure, after Asian stocks rallied, reducing the demand further for safe haven assets.
The Euro also rose against the U.S Dollar on Monday, amid speculation European officials will actually approve additional assistance for Greece as part of efforts to reduce the nation’s debt crisis. The single currency was up 0.8% against the Dollar to 1.4393, after rising to the strongest level since May 11th.
The focus this week will fall on U.S manufacturing and services ISMs for May and given the disappointing result of the GDP figures in the first quarter, the result of the data will be watched closely. Elsewhere, the Non-farm payrolls figures for the same month will also be released on Friday with the unemployment rate set to remain unchanged at 9%.
U.K 11:00 – Land Registry House Prices (April)
GER 09:00 – Unemployment (May)
EU 10:00 – Flash HICP (May)
CAN 14:00 – BoC Interest Rate Announcement
U.S 14:00 – Case Shiller House Prices (March)
U.S 14:45 – Chicago PMI (May)
U.S 15:00 – Consumer Confidence (May)