Foreign Currency Exchange Rate Forecast – The Pound continued to decline against the U.S Dollar


by Adam Solomon

Sterling / Euro and US Dollar

The Pound continued to decline against the U.S Dollar exchange rate yesterday, dropping to a low of 1.6236 in London, while the UK currency also fell versus the Euro, after a report from the Office of National Statistics showed that UK manufacturing came in short of expectations in March. Output at UK factories climbed just 0.2% from the previous month and overall industrial production rose 0.3%, despite initial estimates of a 0.8% increase.

The report confirms that during the first quarter, production rose just 0.2%, clouding the economic outlook even further following declines in services, housing and consumer spending. Recent economic reports don’t even take into account the full extent of the government’s fiscal spending cuts and growth in the economy will probably deteriorate further over the coming months.

The Pound also came under further selling pressure against the Dollar as UK stocks slumped for a second day, falling 1.1% by midday in London. In the Bank of England’s quarterly inflation report, King said that while policy makers believe the recent “softness” in the UK economy will be temporary, there are clear “downside risks”, leading to a downgrade of growth projections this year.

The UK economy grew just 0.5% in the first quarter, lower than expected, and barely enough to erase the contraction from the fourth quarter of 2010. Although the industrial production data was weaker-than-expected, the index for manufacturing is now at its highest level since October 2008. There is every chance that the growth figures from the first quarter will be revised higher, but the risks to the economy are very much weighted to the downside.

The Pound has dropped by roughly a quarter on a trade-weighted basis since the start of the recession in 2007, which has boosted the competitiveness of British exports. It seems a bit short-sighted to assume that the pickup in exports will help drive the UK economy this year, considering manufacturing accounts for less than 15% of gross domestic product.

The Pound has declined against the Euro and the Dollar this morning, dropping back under 1.14 versus the single currency, after the Institute for Fiscal Studies said that UK living standards will fall as inflation continues to accelerate, while wage growth stagnates. The UK currency was weaker against all but two of the 16 most actively traded currencies, as earnings declined by 3.8% in real terms in the 11-months through February.

Elsewhere, the research company Acadametrics Ltd said that UK house prices rose in April, due to a lack of properties for sale and a rush to beat the sales-tax increase. The average price of a home in the UK increased 0,3% from the previous month and from this time last year prices were up 0.9%. The Pound seems to be losing a bit of momentum against the Euro after rising to a six week high.

Euro / US Dollar

The Euro exchange rate remained under pressure against the Dollar yesterday, trading close to the lowest level in five weeks at 1.4125. Further weakness in commodity markets triggered fresh demand for the Dollar on a yield basis, while speculative positions were reduced. In terms of economic data, U.S initial jobless claims declined to 434,000 in the latest week, while there was a modest slowdown in the rate of retail sales growth for April.

The structural vulnerabilities within the Euro-zone remained an important influence yesterday with further economic and political discussion surrounding the Greek debt situation. The Euro received a boost after Lucas Papademos, former ECB Vice President, said that restructuring the struggling nation’s debt is not necessary.

The Euro bounced back towards 1.43 against the Dollar during the European session, but speculation that Greece will still need to restructure its debt may undermine the single currency in the weeks ahead. The focus today will fall on the flash estimate of Euro-zone gross domestic product in the first quarter and a strong reading may enhance the possibility of a further rate increase over the coming months.

Data Released Today

EU 10:00 – Flash GDP (Q1)

U.S 13:30 – Consumer Price Index (April) – Ex Food Energy

U.S 13:30 – Real Earnings (April)

U.S 14:15 – Michigan Sentiment (May Prelim)

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