by Adam Solomon
Sterling / Euro and US Dollar exchange rates
Following on from last week, the Pound struggled to sustain its momentum above 1.65 against the US Dollar exchange rate and dipped sharply through the course of the week to lows close to 1.6350. The UK currency also suffered significant losses versus the Euro exchange rate, trading back towards 1.1295, as the market’s attention switches back to the structural vulnerabilities surrounding the UK and the problems in the banking sector.
A report from the Nationwide Building Society showed that an index of consumer confidence recorded a decline to 49 for July, from 51 the previous month. Although the result of the report was modestly better-than-expected, there will be persistent fears surrounding the pace of the economic recovery, as growth remains very weak.
Confidence in the UK may drop further following the worst civil unrest since the 1980s and concern about the European debt crisis spreading to the UK. Escalating fears surrounding the global economy have wiped trillions of Dollars worldwide off the value of equity markets in the past month. The Bank of England has also kept interest rates at a record low, as stuttering growth outweighed the risk of rising inflation.
UK inflation has outpaced wage growth considerably this year, putting pressure on consumer spending at a time when the government spending cuts are fueling concerns about rising unemployment. Up to 300,000 public sector jobs are expected to be slashed over a four-year period and the government is hoping the private-sector will help contain joblessness.
Average earnings remained unchanged at 2.5% in the three months through July, while consumer price growth rose at an annual rate of 4.4%. Prices are going up, while consumers are earning less and with this trend, confidence is unlikely to improve for the remainder of 2011. The report also showed that Britons have become more pessimistic about the housing market over the past month.
The focus seems to be returning to the inherent problems surrounding the UK economy, amid suggestions that the Bank of England will revive the bond-purchasing plan later this year to support growth. The UK economy barely grew in the second quarter at 0.2% and with the problems escalating in the third quarter, it is becoming increasingly likely that we’ll see a contraction in growth.
The Pound has subsequently come under renewed selling pressure against the majors and further losses may be likely after the revised estimate of gross domestic product in the second quarter remained unchanged at 0.2%, despite Nick Clegg’s insistence that the figures would be revised higher. The Pound also attracted reduced defensive support towards the end of the week, amid suggestions that recent buying, as a haven from the turmoil in Europe and the U.S, had been excessive.
The Pound recovered to some extent against the Dollar on Bank holiday Monday, pushing to highs near 1.6450 in subdued trading conditions. The UK currency did gain some support from an improvement in risk appetite, although the mood remained very cautious with Hurricane Irene battering the east coast of the U.S.
The latest survey from the Confederation of British Industry for services-sector activity showed a sharp deterioration in confidence for the month and a decline in orders. This will maintain fears over the economic outlook and there may be caution ahead of the manufacturing PMI released later this week with a further reading below 50 likely to damage confidence even further.
Euro / US Dollar exchange rates
The Dollar maintained gains against the Euro exchange rate through the course of the week and traded higher versus the majority of the 16 most actively traded currencies, amid speculation that the Fed chairman Ben Bernanke would indicate that further quantitative easing measures would be introduced. The Euro recovered through the course of the day on Thursday and there were further reports of Euro buying from Asian central banks, as part of their underlying reserve management operations.
The German Ifo business confidence was significantly weaker-than-expected with a decline for August, which was the lowest level in 10-months. The report suggests that the German economy is losing momentum very quickly and that will create speculation that the overall growth rate in Europe is slipping, forcing the ECB to consider cutting interest rates.
The Dollar found support through further evidence of stresses within financial markets, as Libor rates continued to move higher. There were also concerns surrounding the banking sector as credit default swaps continued to rise. In the U.S, the durable goods orders data was stronger-than-expected with an increase of 4% for July, following a revised 1.3% decline for the previous month.
The Euro rose towards 1.4550 against the Dollar on Monday, before drifting weaker through the course of the day, amid a general improvement in risk appetite. Bernanke seemed to indicate that the FOMC would consider implementing additional stimulus at the September meeting. The U.S spending data was stronger-than-expected with a 0.8% recovery in consumer spending for July.
The focus this week will largely fall on Friday’s U.S employment report with payrolls expected to have increased by just 72,000 on average of the past three months. The forecasts are for another month of indifferent payroll growth in August and it is also anticipated that the rate of unemployment will remain unchanged at 9.1%.
Today’s Exchange Rate Data
U.K 09:30 – Mortgage Approvals (July)
EU 10:00 – Economic Sentiment (August) – Industrial / Services / Consumer
U.S 14:00 – Case Shiller House Prices (June)
U.S 15:00 – Consumer Confidence (August)
U.S 19:00 – FOMC Publishes Minutes of 9th August Meeting