by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound declined to the lowest level in three weeks against the US Dollar exchange rate yesterday, after a report showed that confidence in the outlook for UK employment weakened last month. The UK currency extended two weeks of losses against the Yen and slumped below the 200-day moving average against the Dollar for the first time since July, which suggests that further downside movement is likely.
In contrast, the Pound continued to push higher against the Euro exchange rate in the short-term, rising above 1.14, despite reports that growth in service industries slowed in August. Goldman Sachs Group Inc said today that it expects the Bank of England to resume the quantitative easing program over the coming months and doesn’t expect the MPC to raise interest rates until 2013.
Therefore, the Pound is likely to come under further selling pressure over the coming months and the current rate to buy Euros may represent a good opportunity. The Pound was weaker ahead of the UK PMI services-sector index, which weakened sharply to a reading of 51.1 for August, from 55.4 the previous month. The represented the biggest decline for over a decade and the lowest reading since December last year when growth in the sector contracted.
There was a sharp decline in confidence and employment levels also continued to decline. The lack of confidence in the economy was illustrated by a report overnight from the British Retail Consortium, which showed that retail sales declined 0.6% in the year to August, from a 0.6% gain previously. Consumer confidence has plummeted this year on weaker job growth and a decline in credit conditions.
There was also further speculation yesterday that the Bank of England will embark on further quantitative easing to stave off the threat of another recession and that will also tend to undermine the Pound. Thursday’s MPC meeting will also be pivotal with some speculation that policy makers could act as early as this month.
The Pound traded under 1.61 against the U.S Dollar for the first time in over a month and a move to test long-term support at 1.60 seems inevitable given the events of this week. The UK currency also weakened for a fifth straight day against the Swiss Franc, sliding 1.2% yesterday, although it is more likely that the BoE will resume bond purchasing in November.
Euro / US Dollar exchange rates
The Euro declined for a fifth trading day against the U.S Dollar, after Germany’s ruling party lost the state election, increasing concern that support is fading for bailouts of Europe’s high-deficit nations. Speculation over sovereign debt and the threat of default weighed on risk appetite and helped boost demand for the safest currencies.
The Swiss Franc subsequently rallied against all of the 16 most actively traded currencies, as Greek two-year yields surged above 50%. A loss of support in the region of 1.41 pushed the Euro back towards 1.4050 in early trading on Monday, amid doubts whether Greece’s second bailout package would be ratified as tensions over budget plans continue.
The ECB Chairman Jean-Claude Trichet called for the immediate approvals of Italy’s austerity package and warned that the Central Bank’s bond purchasing program was a temporary measure. Although U.S markets were closed for the Labour Day market holiday, there was a further decline in 10-year yields, as defensive demand for U.S Treasuries continued.
Today’s Exchange Rate Data
U.K 00:01 – BRC Retail Sales (August)
EU 10:00 – Revised GDP (Q2)
GER 11:00 – Industrial Orders (July)
U.S 15:00 – ISM Non-Manufacturing PMI (August) – Business Activity