by Adam Solomon
Sterling / Euro and US Dollar
The Pound declined for a second day against the majority of the majors yesterday, falling to a low of 1.1155 versus the resurgent Euro and trading down to a fresh 12-week low against the U.S Dollar. Bank of England policy maker Adam Posen displayed his dovish stance on inflation, causing traders to scale back expectations of an interest rate increase on concerns about the economic outlook.
Posen has been voting to extend the Bank’s quantitative easing policy to support the fragile recovery and the minutes from the recent MPC meeting show that discussion over further QE took place. Posen dismissed the idea of a rate increase due to rising inflation as “nonsense” and his comments follow dovish statements by two of his colleagues in David Miles and the chief economist Spencer Dale.
The Pound is likely to remain weaker, particularly against the Euro, with the ECB expected to raise interest rates in July and officials nearing a resolution to the Greek debt crisis. The Pound briefly tested resistance at 1.60 against the Dollar before retreating towards a fresh 12-week low in the region of 1.5910.
There was no upward revision to the first quarter gross domestic product data, which disappointed investors who were looking for an improvement to earlier estimates. The current account deficit narrowed to £9.4 billion in the first quarter of 2011 from a revised £13 billion previously. Bank of England testimony on the inflation report and monetary policy was the main focus during the day.
As expected, there was a wide range of comments during the hearings and there will certainly be the threat that divisions will intensify. The underlying message was that interest rates would remain at very low levels. MPC members were, however, also keen to play down the possibility of any further quantitative easing with Governor King stating that further bond purchases could be seen as taking the easy option.
The comments did not help curb more aggressive Sterling selling and the UK currency slumped to fresh record lows against the New Zealand Dollar and the Swiss Franc. The Pound has also traded under 1.11 against the Euro this morning and is struggling to stay above 1.51 versus the Australia Dollar. In short, the bearish outlook for the UK economy is causing Sterling to fall dramatically against a basket of currencies.
The Pound has declined 8% in value on a trade-weighted basis over the past year, making it the third worst performing currency among the 10 most developed nations. The Pound did manage to stem the losses against the U.S Dollar, as UK stocks rose for a second day with the FTSE 100 index advancing 0.8% in London, improving risk appetite and weakening demand for risk.
The Pound is under pressure this morning before a report that is expected to show UK mortgage approvals remained close to the lowest level in four months in May. Banks granted 46,300 home loans last month, compared with 45,166 in April and the data will reinforce concerns over the housing sector and the UK economic outlook as a whole.
Euro / US Dollar
The Euro was again subjected to volatile trading conditions yesterday, finding support just below 1.4250 against the U.S Dollar. The single currency rallied strongly towards 1.44 later in the day, despite the riots in Athens over further austerity measures needed to warrant a further bailout from the EU and the International Monetary Fund.
EU officials continued to insist that there was no plan B for Greece and failure to meet the austerity measures would trigger a default. However, there was greater market optimism over a ‘yes’ vote and that tended to support the Euro, particularly considering the wider improvement in global risk appetite. China also continues to pledge support for the Euro-zone.
There are still important concerns surrounding the Euro-zone banking sector with reports that up to 15 European banks could fail stress tests, with the results due for release in the second week of July. The ECB president Jean-Claude Trichet stated that the central bank still intends to maintain strong vigilance, which suggests that the central bank will raise interest rates in July.
EU 10:00 Business Climate (June)
EU 10:00 Economic Sentiment (June)
– Industrial / Services / Consumer
U.S 15:00 Pending Home Sales (May)