by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound weakened against the majority of the 16 most actively traded currencies on Tuesday, falling to a low close to 1.1250 versus the Euro exchange rate and scaling back towards 1.63 against the U.S Dollar. Sterling also lost ground versus the higher-yielding currencies like the Australian and New Zealand Dollars, as global risk appetite improved and equity markets stabilized.
There was a further weakening of safe haven demand for the Pound from the turmoil in Europe and the U.S, while the UK currency was also subjected to month-end Sterling selling. The UK lending data remained subdued for the month of July, with a net 0.7% increase in personal lending, while money supply growth also disappointed investors.
There was some positive news as UK mortgage approvals rose last month as the Bank of England kept interest rates on hold at a record low of 0.5%, helping to provide a degree of support for the faltering housing market. Lenders granted 49,239 loans for home purchases, compared to 48,500 the previous month, but the reading is less than half the monthly average of 103,000 in the 10-years to 2007 when the financial crisis began.
A separate report from Hometrack Ltd showed that UK house prices fell for a fourth consecutive month in August and demand for homes is likely to weaken further this year. Lower interest rates are helping to limit the drop in home values but the UK economy is expected to weaken further over the coming months, as the government steps up the biggest budget squeeze in the post war era.
The National Housing Federation said that home ownership in England will decline over the next decade, as banks’ demands for larger deposits will mean first time buyers won’t have the option to buy. Ownership is expected to fall 63.8% by 2021, the lowest since the mid-1980s. The UK economy has slowed 0.2% in the second quarter, from a revised 0.5% in the first three months of the year and it is becoming increasingly likely that the third or fourth quarter will see a contraction in growth.
The Pound continued its downward move against the majors following the data, which reinforced expectations that the Bank of England will maintain very loose monetary policy and even implement further quantitative easing measures. The focus this week will be on Thursday’s manufacturing PMI and any further deterioration would certainly undermine the outlook.
A report overnight showed that UK consumer confidence declined for a third straight month in August. An index of sentiment slipped to minus 31 from July and a measure of households’ expectations for the economy fell 4 points to minus 31. Consumer confidence has also weakened in the Euro-zone and the U.S, as volatility in financial markets and signs of stuttering growth undermined sentiment.
Euro / US Dollar exchange rates
The Euro exchange rate slumped against the Dollar yesterday and lost ground versus a basket of currencies, amid speculation that the European Central Bank will not be raising interest rates further, as the economy struggles to contain the levels of sovereign debt. A report yesterday showed that U.S consumer confidence plunged to the lowest level since April 2009, which spurred demand for the Dollar as a safe haven.
The minutes from this month’s FOMC rate announcement showed that a few policy makers favoured more aggressive action to stimulate the U.S economy. However, the Euro fell for the first time in three days against the Dollar in the build up to next week’s ECB meeting. The Euro extended its losses after the European Commission said that an index of industrial and consumer sentiment fell to the lowest level since May 2010.
The European economy grew by just 0.2% in the second quarter, the slowest pace of expansion since 2009, while Italian bonds fell for a seventh straight day. There were further reports that the ECB was again buying peripheral bonds, which helped curb Euro selling and there was renewed speculation of increased sovereign demand for the single currency.
Today’s Exchange Rate Data
U.K 00:01 – GFK Consumer Confidence (August)
GER 09:00 – Unemployment (August)
EU 10:00 – Flash HICP (August)
EU 10:00 – Unemployment (July)
U.S 13:15 – ADP Employment (August)
U.S 14:45 – Chicago PMI (August)
U.S 15:00 – Factory Orders (July)