by Adam Solomon
Sterling / Euro and US Dollar
The Pound declined against the Euro exchange rate for a third straight day, briefly trading under 1.11 in early trading, while the UK currency also remained under pressure versus a basket of currencies. The pessimistic outlook for the UK economy has severely weakened Sterling sentiment in recent weeks with many economists anticipating that interest rates will remain unchanged for the next year.
Also, talk of further quantitative easing has also weighed heavily on the Pound, as some MPC members are concerned over the sustainability of the economic recovery. Crucially yesterday, the Greek Prime Minister George Papandreou won enough votes to pass through the first part of the austerity plan, meaning that the threat of a default has gone away for the time being, bringing a sense of stability to the market and benefiting the Euro.
Although the single currency has slumped back under 1.44 against the Dollar in the wake of the announcement, the market will now focus on the prospect of an interest rate increase on July 7th. The Pound found support on dips below 1.60 against the U.S Dollar and rallied firmly during the course of the day, amid a revival in risk appetite.
The Pound continued to trade lower versus the Euro, briefly testing support below 1.11, amid reports that the Bundesbank was buying Euros against the Pound and there was also a month-end Euro demand, which helped drive the single currency higher. The latest consumer lending and mortgage approvals data was marginally stronger-than-expected, but there was a lack of any strong rebound in spending.
The latest consumer confidence data showed that sentiment fell more-than-expected in June, erasing part of the boost from the Bank holidays. The Gfk index of sentiment fell 4 points to minus 25 from May, while confidence in the economic outlook for the next year also dropped. The outlook for the high street over the coming months is increasingly bleak with a number of large retail chains struggling to stave off the threat of administration.
UK consumer confidence is faltering as inflation accelerates at the fastest pace since the 1970s but rising prices do not coincide with faster wage growth, while the government’s fiscal cuts means that unemployment is rising. Public-sector workers are striking today against government job cuts and pension reforms. The UK economy remains in a fragile state as growth stagnated in the first quarter and the possibility of a second-quarter contraction remains a real concern for officials.
Gross domestic product increased just 0.5% in the three months to March, barely enough to erase the fourth quarter contraction from last year. Real incomes fell for the first time since 1981 last year and a separate report yesterday showed that UK services sector growth is stalling. Services industries shrank the most in more than a year in April, contracting 1.2% through March.
The Pound has declined to fresh record lows against the Australian and New Zealand Dollar this morning, trading under 1.50 versus the Aussie. The UK currency has also moved to test support in the region of 1.10 versus the Euro and further downside moves appear increasingly likely. The Pound also came under renewed pressure this morning, as a report showed UK house prices were relatively unchanged this month.
Euro / US Dollar
The Euro exchange rate moved higher against the Dollar on Wednesday, moving up towards the strongest level in three-weeks, with markets increasingly confident that the Greek parliament would back the €78 billion austerity package. From lows in the region of 1.4350, the Euro pushed above 1.44 ahead of the vote. The single currency retreated initially but then rallied overnight as risk appetite improved.
There were also further reports of sovereign Euro buying, which continued to support the Euro, especially with suggestions that China was buying aggressively and there was also evidence of month-end Euro buying. There will be a second parliamentary vote today related to the implementation of individual components of the austerity plan and approval would also be needed.
Assuming the package is approved today, the focus will then switch to the ECB interest rate announcement next week. There is widespread speculation that the central bank will raise interest rates by 25 basis points and the Euro is gaining on yield support. In the U.S, the pending home sales data was better-than-expected with an 8.2% gain for May but defensive demand for the Dollar continued to deteriorate, as risk appetite came back into the market.
U.K 07:00 – Nationwide House Prices (June)
EU 09:00 – M3 / 3 Month Moving Average (May)
GER 09:00 – Unemployment (June)
EU 10:00 – Flash HICP (June)
U.S 13:30 – Initial Jobless Claims (w/e 25th June)
U.S 14:45 – Chicago PMI (June)