Foreign Exchange News – The Pound extended its decline against the Euro exchange rate


by Adam Solomon

Sterling / Euro and US Dollar

The Pound extended its decline against the Euro exchange rate yesterday, trading as low as 1.1209, while the UK currency also struggled to stem the flow of losses versus most of the major currencies. The Pound fell and government bonds rose, bouncing back from last week’s yearly low, after manufacturing and services indexes slumped by more-than-expected, while UK mortgage approvals plunged to the lowest level in four months.

The second quarter data has increased fears that the economy will struggle to gain momentum this year, while inflation continues to accelerate at the fastest pace in two years. The revival in Euro sentiment also continued against the U.S Dollar, as the single currency touched its strongest level in a month, amid speculation that EU officials will reiterate their intent to provide additional aid to Greece.

There is also widespread speculation that the ECB will announce on Thursday their desire to raise interest rates in the Euro-zone, extending the yield advantage by another 25 basis points. The Pound encountered strong resistance in the region of 1.6450 against the U.S Dollar and dipped lower to test support at 1.6350.

A report from the International Monetary Fund broadly endorsed the government’s deficit-reduction plan, saying the current economic weakness is “temporary.” The IMF also said that the current increase in inflation was also a temporary measure and that it’s appropriate for the Bank of England to maintain the “current scale of monetary stimulus.”

The Chancellor of the Exchequer George Osborne said yesterday that he would keep to his austerity program, despite calls from a number of leading economists that the cuts are too damaging to the economy and will actually increase the deficit by reducing tax income and increasing welfare costs. Recent reports have indicated that the economy stagnated in the six months through March and the second quarter figures aren’t proving too encouraging.

The report from the IMF will do little to support Sterling because it vindicates the Bank of England’s decision to keep interest rates unchanged at a record low of 0.5%. The Monetary Policy Committee announcement on Thursday is likely to result in a no change to UK borrowing costs for another month with policy makers still split on the best course of action.

The IMF also lowered its 2011 forecast for UK economic growth to 1.5% from 1.7% in its World Economic Outlook in April. The Fund expects growth to accelerate to 2.5% in the medium term but these estimates seem a little too optimistic in the current climate. The Pound was down 0.3% against the Dollar following the report and further downside movement appears likely in the short-term.

A separate report from the Engineering Employers Federation showed that UK factory production actually strengthened in the second quarter, as companies benefiting from a weak Pound and the surge in export orders. A measure of output rose to a reading of 28, from 25 in the first three months of the year, as the Pound 25% drop on a trade-weighted basis since the start of 2007 bolstered manufacturers and increased demand for British-made products.

The Pound continued to weaken against the Euro through the Asian trading session overnight, after a report from the British Retail Consortium reported that retail sales unexpectedly declined in May. The UK currency also lost ground versus the majority of the 16 most actively traded currencies, as sales fell 2.1% from a year earlier.

The decline in sales follows a 5.25 increase for April and proves that the figures were skewed to the upside following the public holidays over Easter and the royal wedding. Rising inflation and government spending cuts are weighing heavily on UK consumer confidence, as household spending dropped the most in two years during the first quarter.

Euro / US Dollar

The Euro surged to a one month high against the Dollar yesterday and the resurgence in the single currency has corresponded with strong speculation that the European Central Bank is preparing to raise interest rates in July. In addition, a government spokesman in Germany said that the chancellor Angela Merkel told U.S president Barack Obama that the Euro-zone will overcome the sovereign debt crisis.

The Euro extended its upward move against the Dollar and the Yen later in the day, after the ECB president Jean-Claude Trichet gave a strong indication of his willingness to sanction bond rollovers in Greece. The Euro pushed to a high above 1.4650 against the Dollar but tailed off towards the close of trading, after Euro-group head Juncker stated that the Euro was overvalued against all major currencies.

There was also a further decline in the Euro-zone Sentix business confidence index, which failed to have a significant impact on the market. There were no major U.S data released yesterday with the Dollar undermined by concerns over the economy and the possibility of further quantitative easing from the Federal Reserve.

Today’s Data

EU 10:00 – Retail Sales (April)

GER 11:00 – Industrial Orders (April)

U.S 20:00 – Consumer Credit (April)

Leave a Reply