by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound declined against the U.S Dollar for the fourth straight day, trading at a low of 1.5764 in London, while the UK currency also lost ground for a second day versus the Euro. The UK currency declined as global stocks slumped amid concern of a Greek default, while European and Italian borrowing costs rose at a debt sale.
A report in the UK yesterday showed that UK house prices fell last month, while inflation in August matched the fastest pace since the peak of the recession in October 2008. Rising consumer prices to more than double the 2% target have done little to influence the BoE to raise interest rates and the report was met with a fairly muted response from investors.
The Bank of England elected to keep interest rates at a record low of 0.5% last week, amid concern that an interest rate increase at this stage to quell inflation to push the economy into recession. Instead, it looks increasingly likely that policy makers will move to support growth by extending bond purchases over the coming months, a move that would tend to weaken the Pound.
Although the BoE expect consumer price growth to breach 5% over the coming months, Goldman Sachs Group Inc and Citigroup Inc have said that the central bank will probably resume quantitative easing by November to support the economy. The official third quarter growth figures will also take on added significance considering the economy barely grew in the three months to June.
After initially finding a level support in the region of 1.5750 against the U.S Dollar, the Pound dipped again during the Asian trading session overnight, while the UK currency also traded lower versus the Euro for a third straight day. After reaching the highest level since May against the single currency last week, we have seen a corrective recovery so far this week with the market consolidating back towards the first point of support.
A separate report from the Office of National Statistics yesterday showed that the UK trade deficit remained largely unchanged at £8.9 billion for July, which will dampen expectations that there will be significant support from UK exports, amid slowing demand from overseas. Growth in UK manufacturing has contracted in recent months, led by a slowdown in demand for British made products.
Elsewhere yesterday, Bank of England policy member Adam Posen called for additional stimulus in the form of quantitative easing. He also called for international action to support the global economy and not just measures within the UK. There will still be an element of defensive demand for the Pound from its position outside the Euro, as UK benchmark bond yields remained at very low levels.
Euro / US Dollar exchange rates
The Euro plunged to its lowest level in a decade versus the Japanese Yen yesterday, while the single currency also lost ground versus the Dollar, as global risk appetite declined on speculation Greece is edging closer towards default, while Italy’s borrowing costs soared at the latest bond auction. The Euro also came under pressure after a statement by a spokesman for the French President Nicolas Sarkozy said that he and Angel Merkel won’t announce joint initiatives on the debt crisis.
The Euro initially found support on a drop towards 1.3550 and peaked at high of 1.3750 before the announcement by the French government. Reports emerged last night that a statement was being drafted, but was not approved by Germany. Merkel did voice opposition to an uncontrolled Greek default and tensions will remain high.
There are escalating concerns that Italian debt is quickly getting out of control with 5-year yields rising to the highest level since the Euro was introduced in 1999. There were no major U.S events during the day with a small increase in the latest consumer confidence data. The U.S retail sales report will be watched closely today, although the immediate impact may be limited as the focus remains over the problems in Europe surrounding sovereign debt and the threat of a Greek default.
Today’s Exchange Rate Data
U.K 09:30 – Claimant Count (August) – ILO Unemployment
U.K 09:30 – Weekly Earnings / Ex Bonuses (July)
EU 10:00 – Industrial Production (July)
U.S 13:30 – Producer Price Index (August)
U.S 13:30 – Retail Sales (August)
U.S 15:00 – Business Inventories (July)