by Adam Solomon
Sterling / Euro and US Dollar exchange rates
Following on from last week, the Pound extended its decline against the U.S Dollar yesterday, while the UK currency also lost ground versus the majority of the majors, after a report from the Halifax showed that a gauge UK house prices fell for the first time in four months in August. Prices slumped 1.2% from the previous month, as consumer confidence plunged and Briton’s became more concerned about the economic outlook.
Consumer sentiment has declined heavily this year as government spending cuts and rising inflation curbed household spending and slowed the economy even more. Reports over the past week have showed that the pace of manufacturing growth contracted for a second month, while service sector growth also slowed and unemployment rose.
The Pound received a timely boost on Thursday, rising against both the Euro and the U.S Dollar, after the Bank of England kept interest rates on hold at a record low of 0.5% and opted against extending quantitative easing measures to support the economy. The Pound had been weakening on speculation the MPC would begin bond purchasing again this month but news that policy makers have decided against the move, for the moment at least, has benefited Sterling.
The European Central Bank also met to announce that European interest rates would remain on hold and investors were waiting for the Chairman Jean-Claude Trichet to deliver his accompanying statement. The Euro declined as Trichet said that “downside risks” to the Euro-zone economy have worsened over the past month.
Trichet has adopted a more dovish stance and interest rates in the Euro-region are likely to remain on hold over the coming months with an increased risk of a cut. The Pound and the Dollar took advantage of broad Euro weakness in the market and the U.S currency was strengthening in the build up to Barack Obama’s speech on jobs reform.
The Pound found support in the region of 1.59 against the U.S Dollar, bouncing back from the lowest level in eight weeks before the BoE rate announcement, amid concerns that the UK economy could weaken further over the coming months. The UK currency strengthened against all but one of the 16 most actively traded currencies on the announcement that the MPC will refrain from bond purchases this month.
Quantitative easing tends to weaken currencies by pushing down interest rates and increasing the supply of money in the financial system. The Pound rallied to a high of 1.6050 against the U.S Dollar, after earlier recording a low of 1.5913, the weakest level since July 13th. The Bank of England stopped buying bonds in early 2010 as the economy emerged from a recession, but the government spending cuts and lack of global demand have weakened growth significantly.
UK economic growth slowed to 0.2% in the three months through August, from 0.6% in the previous quarter. While the pace of growth slows, the annual inflation rate was at 4.4% in July, more than double the government’s target. It seems increasingly likely that the UK economy will slip into negative growth this year and the Pound is likely to lose this momentum over the coming months.
The Pound declined to a low of 1.5795 against the U.S Dollar over the weekend, as UK stocks slumped, led by a decline in banking shares, while the UK currency continued to take advantage of broad Euro weakness, trading up through 1.16. A report from the Office of National Statistics showed that UK factory prices rose just 0.1% from July, which represents the smallest increase since September 2010 and suggests that inflationary pressures are receding as the economy slows.
The Pound has rallied to the highest level against the Euro since May 29th and continued its advance over the weekend, as investors continued to sell the single currency following the dovish statement from the ECB chairman Trichet on Thursday and escalating concerns surrounding the banking sector. The Euro also declined to a fresh six month low against the U.S Dollar, amid speculation that the ECB will cut interest rates, amid a slowing global growth and the threat of contagion to other high deficit nations.
Euro buyers may wish to take advantage of the current rate, as the Pound is likely to come under pressure over the coming months, amid speculation that the economy is slowing towards contraction in the third quarter and the prospect of further quantitative easing from the Bank of England. If you would like a live dealing quote, you just need to simply respond to this email or contact me on my direct line below.
In terms of economic data, the focus this week will fall on the latest consumer price data for August and the report should confirm that inflation remains well above the 2% target. Retail sales and unemployment reports for the same period also feature and should reflect the weakness of the domestic economy.
Euro / US Dollar exchange rates
The Euro held above 1.40 against the U.S Dollar ahead of the ECB interest rate announcement and accompanying press conference. However, Trichet’s dovish outlook on the Euro-zone economic outlook pushed the single currency to a low just under 1.39 over night on Thursday and fell to another low just under 1.36.
Trichet stated that the risks to economic growth were now firmly weighted to the downside and there had been a significant change in ECB policy stance. The Central Bank are likely to keep interest rates at the current level and there is now a real risk of a cut in borrowing costs. There were further warnings from German officials that Greece must meet its deficit-reduction target in order to receive the next tranche of loan support.
The Greek economy contracted by over 7% in the year to the second quarter and there are increasing doubts whether Euro membership was viable in the long-term. The U.S jobless claims data was relatively unchanged but there was a big improvement in the international trade balance with the deficit narrowing to $44.8 billion for July.
The Euro came under significant selling pressure on Friday by the announcement that the European Central Bank chief economist Juergen Stark will resign from the governing council on concerns about the bond-purchasing program. The departure of the Bundesbank head and the ECB chief economist within a few months will be a concerning factor for the Euro.