by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound received a timely boost yesterday, 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 yesterday afternoon.
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.
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, as the ECB presented fresh forecasts for the Euro-region with modest downward revisions to growth and inflation.
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.
Today’s Exchange Rate Data
U.K 09:30 – Producer Price Index (August) – Output
U.K 09:30 – Trade Balance (July)
U.S 15:00 – Wholesale Inventories (July)