The Euro was subjected to heavy selling pressure on Friday, as rumours spread of an SP sovereign rating downgrade in up to nine EU nations.
by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound remained under pressure against the U.S Dollar last week, while the UK currency also lost over 1% versus the Euro on Thursday, following the latest Bank of England interest rate announcement. The Monetary Policy Committee kept interest rates unchanged at a record low of 0.5% and decided against announcing any increase in the quantitative easing plan.
Policy makers have indicated that they will wait for the current round of purchases to finish in February before considering administering anymore and it’s fair to say the improvement in recent economic indicators has increased optimism that the economy is improving. However, the data failed to provide any support to the Pound, as industrial production declined 0.6% in November, while manufacturing output also registered a small decline.
The data is likely to trigger a modest downward revision to fourth quarter gross domestic product estimates. The recent NIESR estimate showed a 0.1% expansion for the fourth quarter but there is still a chance of a contraction in growth. The Pound slipped below 1.20 against the Euro exchange rate, albeit briefly, and the single currency made gains versus the Dollar, after well received bond auctions in Italy and Spain.
The ECB press conference also provided underlying support to the Euro, as peripheral yields fell sharply. The Central Bank left interest rates unchanged at 1% following rate cuts at the two previous meetings. In his statement, the chairman Draghi stated that there was evidence the economy was stabilising and there was no suggestions of a further rate cut next month.
The Euro was subjected to heavy selling pressure on Friday, as rumours spread of an SP sovereign rating downgrade in up to nine EU nations. The French rating was cut by one notch to AA+ with a negative outlook, while Austria also lost its AAA status. There was an element of relief that there had only been a one-notch downgrade, but there were still important negative implications, as it would make it difficult for reserve managers to hold French debt.
The Pound was unable to regain the 1.54 level against the Dollar on Friday and was subjected to heavy selling pressure to a low of 1.5250 during the U.S session. The latest producer price data was sharply weaker-than-expected with a decline in input prices to the lowest annual rate for 18-months. Markets will therefore be expecting a sharp decline in consumer price inflation on Tuesday, which will reinforce expectations of a move to additional quantitative easing.
Last night, the latest Rightmove house price index registered a decline of 0.8% for December, after a 2.7% fall previously, maintaining expectations of underlying weakness, which would tend to impact on consumer spending. There was some evidence of fresh defensive Sterling demand given the Euro-zone ratings cuts and it advanced back above 1.20 by the close of trading.
Elsewhere this week, Wednesday’s unemployment report for December should reflect the impact of a weak UK economy on the labour market, with the claimant count forecast to rise by another 10,000. The jobless rate for the three months to November is expected to remain at 8.3%. Friday’s retail sales report for December will also be watched closely and a sharp recovery in sales from the previous month’s decline of 0.4%.
Euro / US Dollar exchange rates
The Euro initially maintained a firm tone on Friday but the credit rating downgrades in Europe pushed the single currency lower again. There was a further decline in peripheral bond yields and pressure to curb short positions ahead of the weekend. After a very strong Spanish bond auction, the latest Italian sale was slightly disappointing in terms of investor demand.
The U.S economic data will be watched closely in the run up to the end of January FOMC meeting. The first of the January sentiment indices will feature this week in the form of the Empire State and Philly Fed manufacturing indices. December’s industrial production data will provide an insight into the state of gross domestic product at the end of the fourth quarter.
Today’s Exchange Rate Data
U.S – Martin Luther King Market Holiday
- Foreign Currency Exchange Rate Forecast – The Euro remained under pressure against the Dollar
- Pound Sterling, the Euro and US Dollar Currency News – The Pound came under renewed selling pressure against the Euro exchange rate
- Pound Sterling, the Euro and US Dollar exchange rate news flash – The Pound remained lower against the majority of the 16 most actively traded currencies
- Pound Sterling, the Euro and US Dollar exchange rate news – The Pound remained in a tight trading range against both the Euro and the U.S Dollar
- Sterling remained on the front foot against the Euro Exchange Rate