by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound declined against the Euro and the Dollar exchange rates, while the UK currency slumped to a fresh record low versus the relentless Swiss Franc, despite efforts from the Swiss National Bank to weaken the currency. The Bank said in a statement that it will “significantly increase” the supply of liquidity to the money market and expand deposits to 120 billion Francs.
While the UK surveyed the wreckage from another night of anarchy on the streets with the worst civil unrest in 30-years, the Office of National Statistics reported that UK manufacturing unexpectedly fell in June and the trade deficit widened, adding to signs that the economic recovery is losing momentum. The UK economy barely grew in the second quarter and recent data points to the likelihood of a third quarter contraction.
The worsening economic outlook and widespread rioting are systemic with an economy losing momentum and edging towards a another slump. Despite the chaos engulfing the UK at present, the Pound has largely been affected by issues elsewhere. The downgrade in the U.S credit rating at the end of last week, combined with escalating concerns over European sovereign debt has led to a severe decline in global risk appetite, weakening the high-yielding currencies by as much as 8% in just a few days.
The Pound has also remained fairly elevated against the Dollar and the Euro exchange rates up until yesterday, as the UK currency fell back towards 1.13 by the close of trading last night. At last, the focus seems to be switching back to the problems in the UK and the Pound may come under further selling pressure in the near-term. To that end, clients holding Sterling may want to take advantage of the current rate, particularly against the Aussie, Kiwi and South African Rand, before further volatility.
The Pound was down 0.9% against the U.S Dollar yesterday, reversing an earlier advance towards 1.6411, while the UK currency lost another 1.1% against the Euro. The most aggressive public spending cuts in a generation, coupled with the worsening debt crisis in the Euro-zone, is hurting the prospects for UK economic growth and adding to speculation that interest rates will remain lower for longer.
The Bank of England is due to release its quarterly inflation report this morning and present new growth and inflation forecasts that are likely to increase speculation that rates will stay on hold and policy makers will look at loosening policy further through a measure known as quantitative easing. Confidence in the UK will remain fragile as civil unrest spreads to other major cities up and down the country.
Euro / US Dollar exchange rates
The Dollar rose against the majority of the 16 most actively traded currencies yesterday, as the Federal Reserve’s pledge to keep interest rates at a record low failed to inspire confidence surrounding the global economic outlook. Ironically, the Dollar gained on risk sentiment and the Euro came under renewed selling pressure on speculation that a slowing economy will prompt the ECB to loosen monetary policy.
The Euro also came under pressure before equity markets rebounded later in the day as the Fed resisted the chance to engage in further quantitative easing. The FOMC released a generally gloomy statement on the health of the economy, stating that downside risks had increased and inflation was expected to decline over the coming months.
The European Central Bank stepped up the purchase of Italian and Spanish bonds in the secondary market and benchmark yields subsequently declined further. There were, however, still tensions surrounding the French credit rating, as credit-default swaps increased for a second day. Nevertheless, the Euro held above 1.4320 overnight, as risk appetite improved.
Today’s Exchange Rate Data
U.K 10:30 – BoE Inflation Report
U.S 15:00 – Wholesale Inventories (June)
U.S 19:00 – Federal Budget (July)