by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound rose to a high of 1.1723 against the Euro in early trading yesterday, following reports on Friday that ECB Chief Economist Juergen Stark resigned because he didn’t agree with the central bank’s bond purchasing policy. In addition, escalating concern over sovereign debt and a Greek default also weighed on the single currency, which declined to its lowest level versus the Yen since 2001.
The Euro also weakened earlier to the lowest level against the U.S Dollar since February, after bets increased that the ECB may have to cut interest rates to shore up the economy. The Pound briefly dipped to support levels below 1.58 against the U.S Dollar yesterday, before recovering towards 1.5850 last night, although the decline in risk sentiment means that further downside moves are likely.
The Pound also weakened sharply against the Euro through the course of the day, trading 1.2% lower from the previous 14-week high to a low of 1.1575. There was still some residual support from Sterling’s position outside the Euro-zone as a haven and sentiment in the local bond market remained firm with no risk of a UK default.
Bond markets in Europe’s most indebted nations fell again yesterday, amid concern that the debt crisis is intensifying as economic growth stagnates. The Pound was relatively unchanged earlier today, after a report from the Royal Institution of Chartered Surveyors showed that a gauge of UK house prices was almost unchanged in August.
The RICS House Price balance showed that the number of real estate agents saying prices fell last month exceeded those reporting gains by 23%, compared to 22% in July. The government has refused to compromise on its deficit reduction plan and have pressed ahead with the largest budget cuts in the post-war era and will need the Bank of England to support the economy by keeping rates on hold and adding to existing stimulus measures.
Consumer confidence has been plummeting in the UK, as higher inflation squeezes household income and leaves the mortgage market little improved from the height of the recession. UK mortgage approvals have held below 50,000 in every month but one since the start of 2010. The National Institute of Economic and Social Research reported last week that economic growth slowed to 0.2% in the three months through August, down from 0.6% in the quarter to July.
The Pound is under pressure against the U.S Dollar, as UK stocks dropped again yesterday, extending last week’s sell-off of the FTSE 100 Index. There is widespread speculation that Germany is preparing for Greece to default, which is sending global equity markets sharply lower and increasing demand for the safest assets.
The focus today in terms of economic data will fall on the latest consumer price inflation report and a weaker-than-expected result could increase speculation that the Bank of England will move to increase quantitative easing measures within the next few months and that will tend to undermine confidence in the Pound.
Euro / US Dollar exchange rates
The Euro found support in the region of 1.35 against the U.S Dollar yesterday and the single currency secured a corrective recovery in volatile trading conditions. The Euro also declined heavily against the Yen and Swiss Franc as risk appetite declined. The Greek announcement that it would introduce fresh austerity measures also lessened immediate concerns over a default.
Underlying confidence remained extremely fragile amid expectations that a default is unavoidable over the coming weeks. There was also strong rhetoric from some elements within the German government calling for Greece to leave the Euro-zone and the official line was the next loan tranche would not be paid unless there was favourable support from the IMF.
As a result, there was a further widening in Greek credit-default swaps, which indicates that underling stresses were increasing. There were also further concerns over the European banking sector with particular focus on France given its exposure to Greek debt. The Euro did gain a degree of support from speculation that the Chinese would buy Italian debt.
Today’s Exchange Rate Data
U.K 00:01 – RICS House Price Balance (August)
U.K 09:30 – DCLG House Prices (July)
U.K 09:30 – CPI (August) – RPI
U.K 09:30 – Trade Balance (July)
U.S 13:30 – Export / Import Prices (August)
U.S 19:00 – Federal Budget (August)