by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound breached the 1.15 level against the Euro exchange rate on Thursday, while the UK currency maintained its recent upward surge through 1.65 against the U.S Dollar. The Office of National Statistics reported that UK retail sales rose by less than initial forecasts in July, as sales increased 0.2% from the previous month. Sterling also made widespread gains versus the higher-yielding currencies, rising to a high just above 1.58 against the Australian Dollar.
UK stocks dropped for a second day, reducing the appeal of higher risk assets, as the FTSE 100 Index fell 2.5% and the gauge has lost 13% since the end of June, wiping off more than $300 billion from the value of UK shares. The Bank of England discussed the possibility of additional stimulus measures this month to support the economy but volatility sweeping through global equity markets continues to dominate recent trends.
The Pound encountered resistance in the region of 1.6550 versus the US Dollar exchange rate but dipped sharply through the course of the afternoon, as stocks fell sharply to record the biggest fall in two and a half years. A further £60 billion was wiped off the value of UK shares and the Pound declined against the safe haven currencies, as traders flocked to the security of safe haven assets.
Risk appetite has deteriorated sharply, causing the high-yielding currencies like the Australian and New Zealand Dollars to weaken significantly against the majors. The Pound rallied above 2.00 versus the Kiwi and 1.59 against the Aussie Dollar, as volatile trading conditions intensified. The FTSE 100 Index has opened this morning and lost 1% in under an hour, forcing Lloyds Banking Group to suspend trading early on Friday.
Escalating concern that the global economy is slowing saw UK stocks slump by the most since March 2009. HSBC Holdings Plc lost 6% yesterday, while Barclays Plc plunged 11%, as the Wall Street Journal reported that U.S regulators will increase their scrutiny of Europe’s largest lenders on concern that a debt crisis in the region may lead to a decline in funding.
Morgan Stanley yesterday cut its forecast for the global economy this year, citing an “insufficient” policy response to Europe’s sovereign debt crisis, weaker consumer confidence and the prospect of fiscal tightening. In the UK, the Bank of England seems to be edging closer to implementing further quantitative easing measures to support growth.
The Pound advanced beyond 1.15 against the Dollar and from a technical perspective a move towards 1.16 appears likely in the short-term, as concerns over sovereign debt and threat of contagion continues to undermine the single currency. Sterling yield support was extremely low and in part this may have been a reflection of defensive support for the Pound against the Euro and the U.S Dollar.
Trends in UK banking shares will come under close scrutiny today and any stresses would potentially weaken the Pound. Bank of England policy makers Martin Weale expressed his hopes that the third quarter GDP growth would be stronger than the second quarter, but this sentiment was largely ignored in the market. The latest government borrowing data this morning will take on added significance and the Pound may come under renewed selling pressure if the report shows that the pace of borrowing increased.
Euro / US Dollar exchange rates
The Dollar gained by the most in two weeks against the majors yesterday, as global stock markets plunged, amid speculation that European banks are lacking sufficient capital. Morgan Stanley also reported yesterday that the U.S and Europe are dangerously close to recession and the decline in risk appetite will only serve to increase demand for the Dollar as a refuge.
The Euro exchange rate encountered resistance in the region of 1.4450 yesterday and came under sustained pressure through the course of the day. In the U.S, the jobless claims data was marginally higher-than-expected at 408,000 in the latest week, while the Philly Fed manufacturing index declined sharply to the lowest reading since 2009.
With existing home sales data also weaker-than-expected, the data reinforced concerns over the U.S economy. Headline consumer price inflation rose 0.5% for July, which was significantly higher than expected to give a 3.6% annual increase. The combination of weak growth and higher inflation will create discomfort in the Federal Reserve and fuel speculation of stagflation.
Today’s Exchange Rate Data
U.K 09:30 – PS Net Borrowing (July)