by Adam Solomon
Sterling / Euro and US Dollar
The Pound failed to consolidate on initial gains against the Euro exchange rate yesterday, while the UK currency traded lower versus the majority of the 16 most actively traded currencies by the close of trading last night. A rare bit of positive data showed that UK business owners expect demand for pick-up over the coming months, prompting speculation that the economy may gather momentum this year and pare bets that the Bank of England will keep interest rates on hold for another year.
The Pound touched a high of 1.60 against the U.S Dollar before losing ground again through the course of the day, while the UK currency also declined through 1.12 versus the Euro. The pessimistic outlook for the Pound seems a little bit overdone at present, particularly when you consider the problems associated with sovereign debt in the Euro-zone, but the lack of appetite for UK assets in general means that further losses appear likely in the short-term.
The Pound fell to a low of 1.1170 against the Euro towards the close of the European trading session, after a report showed that UK house prices fell for a second consecutive month in June. The UK currency also plunged to the lowest level against the Dollar since January, as the average cost of a home in Britain fell 0.1% in June.
The pessimistic tone of UK economic data resumed late yesterday, rekindling concern that the economy is ambling towards a second contraction and weakening the Pound. Futures traders reversed earlier bets that the UK currency will make gains against the US Dollar exchange rate, as the difference in the number of wagers by hedge funds on a decline outnumbered those betting on gains.
The Pound has declined 7.3% in value over the past year, making it the third worst performing currency of the 10 majors after the U.S and Canadian Dollars. Sterling also declined against the Dollar yesterday, despite the improvement in UK stocks, as the FTSE 100 Index advanced 0.4%, reducing traders’ appetite for safe haven assets.
Further speculation that the Bank of England will keep UK interest rates on hold for the next year continues to undermine sterling sentiment and appetite for UK assets as a whole. Although the inflation rate was 4.5% in May, more than double the government’s 2% target, the central bank kept rates unchanged, risking its credibility, to support economic growth.
The Pound also came under pressure against the US Dollar exchange rate and the Yen last night, after Bank of England member and staunch dove Adam Posen said that the UK economy is at “little risk inflation”. Posen dismissed a recommendation from the Bank of International Settlements that central banks need to start raising rates to curb inflation as “nonsense”.
Posen has voted since October to extend the Bank of England’s quantitative easing program and said in a speech yesterday that there is “little or no credit growth, little wage growth beyond productivity, little evidence of rising inflation expectations” in the UK. The Pound may also come under further selling pressure this morning, amid the release of the final estimate of UK gross domestic product for the first quarter, which is expected to confirm a weak pace of growth.
Euro / US Dollar
The Euro encountered support in the region of 1.4110 against the Dollar yesterday and staged a modest rally towards back towards 1.42 later in the day. There was evidence of strong sovereign Euro buying interest but the Greek debt situation has remained an important focus, as tensions remained high ahead of Wednesday’s scheduled austerity vote in parliament.
There is a level of optimism over the plan to roll-over Greek debt held by French banks but there was still controversy over the plan as Euro funds would be used to curb bond-holder losses. Elsewhere, ECB member Juergen Stark stated that the ECB was very vigilant and the bank still appears determined to raise interest rates in July, making the Euro a more attractive commodity on yield grounds.
The Euro exchange rate gained against the majority of the 16 majors yesterday on optimism that Greece will avoid default. The U.S economic data recorded a higher than expected core increase in the personal consumption and expenditure report but there will still be doubts whether the Fed has got inflation under control.
U.K 09:30 – Final GDP (Q1)
U.K 11:00 – Land Registry House Prices (May)
U.S 14:00 – Case Shiller House Prices (April)
U.S 15:00 – Consumer Confidence (June)