by Adam Solomon
Sterling / Euro and US Dollar exchange rates
Following on from last week, the Pound lost some momentum against the Euro exchange rate towards the end of the week, finding support just under the 1.19 level, while the UK currency bounced back above 1.55 against the U.S Dollar, as global risk appetite improved as concerns eased over the European sovereign debt crisis. Spain sold its maximum target at the latest debt auction, while a report in Europe showed that manufacturing and services industries contracted less this month than initial forecasts.
The Euro clawed back above 1.30 versus the U.S Dollar, after weakening to a low of 1.2946 on Wednesday, the lowest level since January 11th. The Euro is enjoying a reprieve but the implications of a systemic debt crisis coupled with the possibility of multiple credit rating downgrades for EU nations means that the recovery may be short-lived.
UK economic data again failed to have a significant market impact but retail sales fell by more than initial estimates for November, as rising unemployment and the looming threat of a recession curtailed household spending. The Pound found support in the region of 1.54 against the U.S Dollar and advanced to highs in the region of 1.5540 on Thursday.
There was a 0.4% decline in UK retail sales, which was marginally worse-than-expected, although it was off-set by an upward revision to October’s figure. Markets remained extremely cautious over the data and the UK economic outlook on the whole, given reports of weak consumer spending trends. There was further evidence of defensive Sterling demand, although there was also some evidence that buying might be fading.
The French ECB governing council member Noyer made a very unhelpful comment that the UK credit rating should be downgraded from the AAA status but it did not appear to have a significant market impact. It did, however, ensure that political tensions between the UK and the Euro-zone remains elevated. The FTSE 100 Index of leading shares climbed 0.6%, which helped to improve risk sentiment.
There are still widespread concerns surrounding the UK economic outlook and the looming threat of a fourth quarter contraction. The Pound will also be susceptible to further quantitative easing by the Bank of England with the current round of asset purchases set to be concluded in February. BoE chief economist Spencer Dale said last week that the economy will probably shrink for one quarter at least.
The Pound remained largely unchanged against the Euro for a second day on Friday, while the UK currency edged marginally higher versus the U.S Dollar, as stocks rallied worldwide, recovering from the earlier downturn. The Euro also made gains versus the U.S Dollar, after Jean-Claude Juncker said that Europe should meet a deadline for arranging loans with the IMF, as part of the package to fight the sovereign debt crisis and bring stability to the market.
The Italian Prime Minister Mario Monti also survived a vote on his budget plan and the Euro gained ground on a bit of optimism that officials are pro-actively dealing with the crisis after the disappointment of the EU summit. The Dollar, alongside the Yen, weakened against currencies linked to growth as stocks rose and reduced demand for safe haven assets.
The latest UK Rightmove house price index recorded a 2.7% decline for December with prices relatively unchanged for the year as a whole. There were some diplomatic attempts to calm the inflammatory rhetoric between France and the UK over issues of credit ratings and economic policy, although underlying tensions persisted.
If the UK can maintain its AAA credit rating at the same time as there are further downgrades within the Euro-zone, there will be scope for further defensive Sterling support even though confidence in the UK economy will remain very fragile. The main focus this week in terms of economic data is Wednesday’s release of the Bank of England minutes and the market will be looking for any insight into the prospect of additional easing next year.
Euro / US Dollar exchange rates
The Euro found support below 1.30 against the Dollar and edged higher through the course of the day on Friday, although the positive move may have been a product of markets consolidating after sharp Euro losses through the course of the week. There was a sense of relief that the services and manufacturing indices didn’t decline further and the Euro also gained against the Dollar on risk appetite.
The data still suggested that the Euro-zone economy is stumbling towards a recession over the coming months. Although there was no announcement on EU credit ratings by Standard Poor’s, markets remained on high alert, as French officials attempted to downplay the potential impact of any cut in the credit rating.
The ECB President Mario Draghi remained very cautious over the possibility of any additional monetary support by the central bank, but there was further speculation that interest rates would be cut and that the bank would eventually succumb to demand for further stimulus measures to be introduced if the situation deteriorates further.
Moody’s Investors Service downgraded Belgium’s credit rating to AA3 from AA1 and there was also action from Fitch, although it affirmed France’s AAA status. It did, however, lower the outlook to negative. There were also downgrades for five other EU economies and the agency also states that a Euro solution was out of reach, which undermined sentiment.
Today’s Exchange Rate Data
EU 09:00 – Current Account (October)
U.S 15:00 – NAHB House Builders’ Sentiment (December)
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