by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound came under renewed selling pressure against the Euro exchange rate yesterday, falling back towards 1.1430 in London, while the UK currency also traded under 1.65 versus the Dollar. An element of stability returned to financial markets following last week’s monumental decline, with £60 billion being wiped off the FTSE 100 Index in under a week.
Speculation surrounding a potential downgrade to France’s AAA credit rating has died down over the weekend and the Euro exchange rate also took advantage of the improvement in global risk appetite. To that end, the Pound also lost momentum versus the higher-yielding currencies, with the New Zealand and Australian Dollars both gaining ground through the course of the day.
In a relatively light week in terms of economic data, the focus will fall on the revised estimate of UK gross domestic product in the second quarter. No revision in the 0.2% growth is anticipated but the Pound may come under further selling pressure, amid speculation that the Bank of England will engage in further quantitative easing over the coming months as a means to support the economy.
The Pound initially found support in the region of 1.6470 against the Dollar but the UK currency was unable to sustain the advance and dipped towards 1.6450 by the close of trading last night. There were further concerns surrounding the UK economy and warnings that real incomes would remain under pressure over the coming months.
Earnings are also expected to fall at a faster rate that the 2009 recession, which would also undermine the pace of consumer spending and weaken the economy even more. Bank of England policy maker Ben Broadbent, who succeeded Andrew Sentence at the end of May, stated that he was broadly in the middle of the MPC debate over interest rates and conceded that there had been a deterioration in the economic outlook over the past few weeks.
The Pound will also be influenced strongly by risk sentiment with the UK currency still gaining a degree of support on relative grounds as a safe haven from the turmoil in Europe and the U.S. There is a lack of economic data released in the UK but the focus today will fall on a report from the Confederation of British Industry showing a decline in UK industrial orders over the past month.
Euro / US Dollar exchange rates
The Dollar declined against the majority of the major currencies yesterday, after a report showed China’s manufacturing industry shrank at a slower pace this month than in July, reducing the appeal of the Dollar as a haven and boosting demand for higher-yielding assets. The Australian Dollar rose as Asian stocks advanced for the first time in four days.
The Euro’s advance was limited before reports today that are expected to show a decline in manufacturing for the region and a slide in German investor confidence. The single currency rose towards 1.4430, after again finding support close to 1.4350 in early trading. There were further concerns within European funding markets yesterday, while speculation intensified that banks were finding it more difficult to secure Dollar liquidity.
The latest ECB statement recorded €14.3 billion in peripheral bond market purchases in the latest week, from €22 billion previously. There was a degree of confidence that the central bank could contain market pressure in the short-term, but the German government remains strongly opposed to any form of Eurobonds.
Today’s Exchange Rate Data
EU 08:58 – Flash Markit Manufacturing PMI (August) – Services – Composite
GER 10:00 – ZEW Index (August)
U.K 11:00 – CBI Industrial Orders (August)
EU 15:00 – Consumer Confidence (August)
U.S 15:00 – New Home Sales (July)