by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound traded close to the lowest level in three weeks against the Euro exchange rate yesterday, while the UK currency bounced back above 1.63 versus the U.S Dollar, despite reports that UK consumer confidence fell in August for the third straight month. The report adds to signs that the economy is struggling to gain momentum in the third quarter, after growing just 0.2% in the three months to June.
Business confidence in the economic outlook slumped by the most in August since 2009, pushing the Pound lower against a basket of currencies. The Pound has, however, made modest gains versus the U.S Dollar and Swiss Franc, as global risk appetite continues to improve, reducing demand for safe haven currencies. UK 10-year bonds also fell for a second day, highlighting the renewed sense of confidence in financial markets.
The Pound is currently the second worst performing currency this year, declining 7.8% in value on a trade weighted basis since the start of the year, with the U.S Dollar falling 14%. Lloyds Corporate Markets said on Tuesday that the Nationwide Building Society will probably report that house prices remained largely unchanged this month, after increasing just 0.2% in July.
The report this morning was far worse-than-expected as UK house prices slumped by the most in 10-months in August, as a slowing economic recovery threatens to undermine demand. A report last week indicated that home ownership will drop to the lowest level since the mid 1980 over the next decade, as consumer’s confidence in the economy continues to plunge.
The average cost of a home in the UK dropped 0.6% to £165,914 from July and values were down 0.4% from a year earlier. A shortage in properties for sale combined with record low interest rates has helped support prices this year but the housing market is still clearly struggling to gain momentum, amid tighter lending conditions and high inflation.
The British Chambers of Commerce cut its economic growth forecasts yesterday, as the global economy slows and Europe’s sovereign debt crisis escalates. The UK government has also implemented the most aggressive public spending cuts in a generation to tackle the nation’s budget deficit, raising the jobless rate significantly and curtailing the pace of the recovery.
The BCC expect the UK economy to grow 1.1% this year and 2.1% in 2012, cutting its June projection for 1.3% in 2011. In all likelihood, gross domestic product will slow by more-than-expected and it is becoming increasingly likely that the economy will slip into negative growth during the third quarter. The focus today will fall on the manufacturing PMI for August and considering that growth in the sector contracted last month, the report is unlikely to boost Sterling sentiment.
Euro / US Dollar exchange rates
The Euro exchange rate was unable to break above resistance in the region of 1.4460 against the U.S Dollar yesterday and traded sharply lower through the course of the day with a test of support in the region of 1.4380. The single currency also lost ground versus a basket of currencies, despite reports that the German government had approved new powers for the EFSF in Wednesday’s cabinet meeting.
There are persistent fears surrounding the Greek banking sector and unease surrounding the Euro-zone financial sector with the threat of contagion still a concern to investors. However, credit default swaps narrowed through the course of the day but this failed to provide any underlying support. In the U.S, the latest ADP employment report showed that private sector job gains rose 91,000 last month, from a revised 114,000 previously.
Considering that government jobs have consistently declined over the past few months, there will be speculation of a poor payroll growth in Friday’s monthly U.S employment report. A figure below expectations will increase speculation of further action from the Federal Reserve in the near-term. Elsewhere, the Chicago PMI index fell by more than anticipated in August, increasing concerns about the state of the economy.
Today’s Exchange Rate Data
U.K 07:00 – Nationwide House Prices (August)
EU 08:58 – Markit Manufacturing PMI (August)
U.K 09:28 – CIPS Manufacturing PMI (August)
U.S 13:30 – Initial Jobless Claims (w/e 27th August)
U.S 13:30 – Revised Productivity / Labour Costs (Q2)
U.S 15:00 – Construction Spending (July)
U.S 15:00 – ISM Manufacturing (August)