by Adam Solomon
Sterling / Euro and US Dollar
The Pound fell against the U.S Dollar exchange rate yesterday, declining to a low of 1.6059 overnight, after global stock markets fell and boosted demand for so-called safe haven assets. The U.S currency also made widespread gains against the majority of the 16 most actively traded currencies, including the Euro, trading under 1.40 for the first time in over a month.
The FTSE 100 Index slumped 1.5% in London, while the Stoxx Europe 600 Index dropped 1.4%. The Pound also came under renewed selling pressure, after the Bank of England chief economist Spencer Dale was slightly more cautious in tone than he was in the BoE minutes last week, indicating that some of the more hawkish members of the MPC may be reining in their desire to raise interest rates.
The Euro is under heavy selling pressure at present, amid renewed concerns over sovereign debt, after Greece was downgraded again and SP warned that Italy’s credit rating may be cut. However, futures markets are pricing in just one rate increase in the UK by the turn of the year, but the ECB are expected to raise once more over the Summer, extending Europe’s yield advantage of the UK by another 25 basis points.
The Pound also declined heavily earlier this morning, falling back towards 1.1450 against the Euro, after Moody’s Investors Service announced that it will consider downgrading debt for 14 out of the 18 British banks and building societies, citing an increased credit risk following the withdrawal of government support.
According to news reports, more than one of the top four UK banks will be among the lenders to be put on review. UK banks accepted roughly £1 trillion in government bailouts and guarantees since the 2008 financial crisis. The review of British banks comes on the same day that global stock markets slump, amid concern that Europe’s debt crisis is worsening and the threat of contagion to other high-deficit regions.
Lloyds Banking Group Plc, Barclays Plc, HSBC Holdings Plc, Royal Bank of Scotland Group Plc and Santander UK Plc have all agreed in February to make credit available to businesses and help boost demand for loans to support consumer spending and the economic recovery. Politicians have criticized UK lenders for failing to boost credit conditions after receiving government bailouts.
Following the news this morning, the Pound has declined against all of the 16 most actively traded currencies, falling for the first time in three days. Barclays Plc also had its outlook on its senior debt changed to negative from stable. Nevertheless, a report is expected to show that Britain’s budget deficit narrowed in April, as the government’s spending cuts take effect.
Net borrowing was £6.5 billion, down from £18.6 billion in March, and the report will be released this morning in the UK. The government plans to eliminate a large proportion of the nation’s deficit, which reached a record level of 11% of gross domestic product last year and by April 2015, officials will have implemented the toughest budget cuts in the post-war era.
Euro / US Dollar
The Euro exchange rate weakened towards the lowest level in nine-weeks against the U.S Dollar and for a third successive day versus the Yen, as global risk appetite declined as global stock markets plummeted through the day. Concern that Europe’s debt crisis is worsening has weighed on the Euro, as the Euro-zone’s industrial output also slows.
A report this morning is expected to show that industrial orders in the Euro-zone declined 1.1% in March from the previous month. Europe’s sovereign debt crisis deepened and political leaders clashed with central bank officials after suggestions of extending maturities on Greek bonds. Fitch Ratings agency yesterday lowered the outlook for Belgium’s credit rating to negative, which followed Standard Poor’s announcement on Friday that Italy’s debt was at risk to downgrade.
Italy announced yesterday that budget cuts would be brought forward to help restore market confidence. Overall confidence in the Euro-zone will remain at a fragile state in the short-term and there was also weaker-than-expected economic data in the form of PMI manufacturing, which dropped to the lowest level in 7-months.
Although the Dollar has gained ground on risk sentiment, the U.S currency was still undermined by expectations that the U.S economy was losing momentum. Restrained growth would keep the FOMC from raising interest rates over the coming months and as a result, the Euro moved back towards 1.4070 overnight even though confidence remains fragile.
GER 09:00 – Ifo Business Climate (May)
U.K 09:30 – PS Net Borrowing (April)
EU 10:00 – Industrial Orders (March)
U.K 12:30 – CBI Distributive Trades Survey (May)
U.S 15:00 – New Home Sales (April)