by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound struggled to sustain its momentum above 1.65 against the U.S Dollar and dipped sharply through the course of the day to a low of 1.6350 last night. The UK currency also suffered significant losses versus the Euro, trading back towards 1.1330, as the market’s attention switches back to the structural vulnerabilities in the UK.
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 day 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 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 yesterday 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.
The Pound has subsequently come under renewed selling pressure against the majors and further losses may be likely in the build up to Friday’s data. There is some speculation that the revised estimate of UK gross domestic product in the second quarter will show a downward revision to growth in the three months to June. The Pound also attracted reduced defensive support during the day, amid suggestions that recent buying, as a haven from the turmoil in Europe and the U.S, had been excessive.
Euro / US Dollar exchange rates
The Dollar maintained gains against the Euro yesterday and traded higher versus the majority of the 16 most actively traded currencies, amid speculation on the tone of Ben Bernanke’s speech today. The Euro recovered through the course of the day 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.
Today’s Exchange Rate Data
U.K 00:01 Nationwide Consumer Confidence (July)
U.K 11:00 CBI Distributive Trades Survey (August)
U.S 13:30 Initial Jobless Claims (w/e 20th August)