by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound traded higher against the US Dollar exchange rate last week, breaching the 1.65 level on Wednesday and rising to the highest level in 14-weeks. The UK currency remained relatively unchanged against the majors, despite the Bank of England minutes revealing that all nine policy makers voted to keep interest rates unchanged this month. Adam Posen maintained his call for an extension to the bond-purchasing program for the 11th consecutive month.
Spencer Dale and Martin Weale have been consistently voting to hike rates to combat rising inflation have withdrawn their recommendation, due to increased concerns over the sustainability of the economic recovery. It was the first unanimous vote on interest rates since May 2010 and provides an indication that the MPC are unified in their efforts to support growth.
UK consumer prices have reached 4.3% in the latest monthly figures, forcing the BoE governor Mervyn King to write a seventh letter of explanation to the Chancellor George Osborne. The Bank of England are caught between a rock and a hard place; policy makers need to lift rates to combat rising consumer prices, but can’t risk dampening the economic recovery even further.
The latest employment data was weaker-than-expected, as the unemployment claimant count rose 37,100 for July, the largest increase for two years, after a revised 31,300 increase the previous month. The jobless rate also unexpectedly rose to 7.9%, from 7.7% previously, but the Pound stood firm after breaching the 1.65 level versus the Dollar with swings in risk sentiment having a more significant market impact.
The figures suggest the labour market is weakening at the same time as the debt crisis in Europe intensifies and spreads to other high deficit nations. Even France is not exempt from speculation of a credit-rating downgrade and concerns over sovereign debt and contagion will continue to undermine confidence in the Euro in the near-term.
The UK claimant count rate rose to 4.9% in July, the highest level since February 2010, from 4.8% the previous month. Claims for jobless benefits continue to be boosted by changes to benefit rules affecting women, though this does not explain all of the increase. The government’s austerity plan will eliminate 300,000 public sector jobs over the four-year period and officials are hoping that the private-sector will pick up the slack.
The Pound breached the 1.15 level against the Euro on Thursday, while the UK currency maintained its recent upward surge through 1.65 against the U.S Dollar through to the end of the week. The Office of National Statistics reported that UK retail sales rose by less than initial forecasts in July, as sales increased 0.2% from the previous month. Sterling also made widespread gains versus the higher-yielding currencies, rising to a high just above 1.58 against the Australian Dollar.
UK stocks dropped for a third day on Friday, reducing the appeal of higher risk assets, as the FTSE 100 Index fell 2.5% and the gauge has lost 13% since the end of June, wiping off more than $300 billion from the value of UK shares. The Pound encountered resistance in the region of 1.6550 versus the Dollar but dipped sharply through the course of the day on Friday, as stocks fell sharply to record the biggest fall in two and a half years.
A further £60 billion was wiped off the value of UK shares and the Pound declined against the safe haven currencies, as traders flocked to the security of safe haven assets like the Yen and Swiss Franc.
Risk appetite has deteriorated sharply, causing the high-yielding currencies like the Australian and New Zealand Dollars to weaken significantly against the majors.
The Pound rallied above 2.00 versus the Kiwi and 1.59 against the Aussie Dollar, as volatile trading conditions intensified. The FTSE 100 Index opened 1% lower on Friday in under an hour, forcing Lloyds Banking Group to suspend trading. HSBC Holdings Plc lost 6% on Thursday, while Barclays Plc plunged 11%, as the Wall Street Journal reported that U.S regulators will increase their scrutiny of Europe’s largest lenders on concern that a debt crisis in the region may lead to a decline in funding.
The Pound advanced beyond 1.15 against the Euro and from a technical perspective a move towards 1.16 appears likely in the short-term, as concerns over sovereign debt and threat of contagion continues to undermine the single currency. Sterling yield support was extremely low and in part this may have been a reflection of defensive support for the Pound against the Euro and the U.S Dollar.
Aside from the level of volatility engulfing financial markets, the focus this week in terms of economic data in the UK will fall on the revised growth figures for the second quarter. The UK economy barely grew in the three months to June and no revision is anticipated. In a relatively light week of data, the CBI will report on industrial orders and the distributive trades survey, while Nationwide consumer confidence also features.
Euro / US Dollar exchange rates
The Dollar gained by the most in two weeks against the majors last week, as global stock markets plunged, amid speculation that European banks are lacking sufficient capital. Morgan Stanley also reported that the U.S and Europe are dangerously close to recession and the decline in risk appetite will only serve to increase demand for the Dollar as a refuge.
The Euro exchange rate encountered resistance in the region of 1.4450 and came under sustained pressure through the course of the day on Thursday. In the U.S, the jobless claims data was marginally higher-than-expected at 408,000 in the latest week, while the Philly Fed manufacturing index declined sharply to the lowest reading since 2009.
The Euro exchange rate found support in the region of 1.4250 against the U.S Dollar on Friday and initially consolidated close to the 1.43 region. The Spanish government reported that it would take further fiscal measures to strengthen the budget, which boosted optimism surrounding the structural outlook in the Euro-region.
There was also speculation that the Federal Reserve would hold an emergency meeting, which undermined confidence in the Dollar. There were, however, no meetings but the Euro retreated from the highs due to a fresh deterioration in risk appetite. There will be the possibility this week of further action by the Fed and in this context, Ben Bernanke’s speech will take on added significance.