by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound declined against the Euro exchange rate yesterday, dropping to a low of 1.1421 in early trading, following a report that showed confidence in the UK employment sector weakened in July. An index of sentiment showed that confidence in job security also fell, as the government spending cuts mean that up to 330,000 jobs will be lost over the next four years.
The Pound rallied for a second day against the US Dollar exchange rate, after Standard Poor’s confirmed the decision to downgrade the U.S credit rating from the AAA status. The G-7 has sought to restore a measure of confidence and prevent a collapse in investor sentiment, after the rating cut and another slump in Italian and Spanish debt intensified threats to the global economy.
There is speculation that the UK credit rating may also be cut by ratings agencies if the government fails to meet its deficit reduction targets this year. The Pound bounced back against the Euro later in the day, rising to a high of 1.1540, while the UK currency continued to take advantage of broad decline in risk sentiment, with the higher-yielding currencies posting further sharp losses.
The Australian and New Zealand Dollar exchange rates both weakened exponentially overnight with the former rising to a high above 1.64 against the Pound. The Kiwi also traded 2.05 overnight before both bounced back following an improvement in Asian stocks. The level of volatility in the market at present has increased daily and there will be further sharp moves, amid aggressive swings in risk sentiment.
The Pound encountered strong resistance above 1.6450 against the U.S Dollar exchange rate yesterday, before weakening steadily through the course of the day. There was an element of Sterling weakness from the rioting in London boroughs, which escalating through the night and reports of violence in other UK cities. In terms of economic data, UK house prices fell by less-than-expected in July because of an increase in demand, according to a report from the Chartered Institution of Chartered Surveyors.
The number of real-estate agents and surveyors saying that prices fell last month exceeded those reporting gains by 22 percentage points. Recent data has indicated that the UK property market is failing to gain momentum, as first time buyers struggle with inflation outpacing wage growth. The British Retail Consortium also reports that the decline in consumer confidence is hurting UK retailers.
The BRC reported that retail sales rose 0.6% in July from a year earlier, while total sales increased
2.5%. However, when you take into account inflation and a sales tax increase, the data early this morning does incubate that people are spending less and that will ultimately hurt the economy, which barely grew in the second quarter.
Underlying confidence in the economy will remain very fragile and the Bank of England are likely to take a downbeat view on Wednesday’s inflation report, especially as a weaker Euro-zone outlook will have a negative impact. There was still a degree of defensive demand for Pound from fears over the Euro-zone economic outlook, but Sterling is likely to be subjected to heavy selling pressure if confidence in the banking sector deteriorates.
Euro / US Dollar exchange rates
The Yen and the Swiss Franc were again the biggest gainers yesterday, rising versus the majority of the majors with the Franc trading at a fresh record high against the Euro, Pound and U.S Dollar exchange rates. Concern about the U.S economic slowdown and the Euro-zone’s debt crisis spurred demand for the two currencies as a haven.
The Dollar fell against the Euro exchange rate on speculation that the Federal Reserve will today reiterate its pledge to keep record monetary stimulus after global equity markets plunged for a third day. The Euro was unable to regain the 1.44 level and came under fresh selling pressure later in the day. The ECB confirmed that it has bought Italian and Spanish bonds in the secondary market, which continued to have an important impact on easing tension into the two countries.
There was fresh concerns surrounding France, as an increase in its credit-default swaps to record highs spurred fears that France could lose its AAA credit rating. The ECB also insisted that buying bonds was a short-term solution and there would need to be a political deal to increase the EFSF facility. In the U.S, the economic reports paled into the background once more, as the major stock indices plunged with the Dow Jones falling by more than 6%.
Today’s Exchange Rate Data
U.K 00:01 – BRC Retail Sales (July)
U.K 00:01 – RICS House Price Balance (July)
U.K 09:30 – Industrial Production (June) – Manufacturing Output
U.K 09:30 – Trade Balance (June) – Non EU Trade
U.S 13:30 – Prelim Productivity (Q2)
U.K 15:00 – NIESR GDP Estimate (3 Mths to July)
U.S 19:15 – FOMC Interest Rate Announcement