by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound weakened against the Euro for a second day on Tuesday, while the UK currency also lost momentum versus a basket of currencies. The Australian Dollar strengthened against the majors, as Asian stocks rallied for the first time in four days and risk appetite improved, raising demand for higher-yielding currencies.
The Dollar, Yen and Swiss Franc subsequently declined and the move was exaggerated by reports that Chinese manufacturing performed better than expected last month. In the Euro-zone, services and manufacturing PMIs held steady in August at the slowest pace in almost two years, adding to signs that the recovery is losing momentum, as concerns escalate that the sovereign debt crisis is spreading to other high deficit nations.
The Pound pushed higher during the European trading session, primarily as a result of U.S Dollar weakness with a peak above 1.6560. The latest economic data provided a degree of relief with an increase in mortgage approvals for the latest month to 33,400, from 32,100 previously, while the CBI industrial survey showed an increase in the orders component.
The data offered some optimism that the manufacturing sector is not as bad as recent reports suggest, but there was still a key lack of confidence surrounding the economy given escalating fears over the outlook for consumer spending. The Pound will find it difficult to gain defensive support during the course of today and we may see a partial correction from the recent upside moves.
An element of stability has returned to financial markets this week as UK government bonds fell and stocks rose. The FTSE 100 Index increased 0.7% yesterday, rising for a second day, led by an improvement in banking shares. Stocks were up worldwide amid speculation that the Federal Reserve will take action to improve the U.S economic outlook.
Lloyds Banking Group Plc rallied 2.7% after a four-day sell-off, amid renewed speculation that the Fed will engage in further quantitative easing this year to support the economy. By the close of trading last night, the Pound had gained 0.3% against the Dollar and depreciated 0.2% versus the Euro. The UK currency has suffered losses versus the single currency for the past two days consecutively, increasing concern that the recent upward move has peaked.
Euro / US Dollar exchange rates
The Euro found support in the region of 1.4350 against the Dollar yesterday and rallied strongly through the course of the day, as risk appetite improved following the rise in global equity markets. The Euro-zone manufacturing PMI index held firm in July, while the services sector data was actually stronger-than-expected.
However, the German ZEW index for investor confidence was sharply weaker-than-expected with a decline in August to the lowest reading since December 2008. The Euro came under heavy selling pressure later in the day, as a separate report showed a significant decline in consumer confidence for August, which suggests that conditions were continuing to deteriorate.
There were further political discussions surrounding an expansion of the EFSF and the issue of collateral surrounding Greek loan payments. In the U.S, the housing data failed to have much of an impact with new home sales falling 0.7% to an annual rate of 298,000 last month. Finally, the former Federal Reserve chairman Alan Greenspan warned investors yesterday over the risk of the Euro breaking down and the Euro was unable to consolidate on yesterday’s gains versus the Dollar, falling back towards 1.44 by the close.
Today’s Exchange Rate Data
GER 09:00 Ifo Business Climate (August)
EU 10:00 Industrial Orders (June)
U.S 13:30 Durable Goods (July)