by Adam Solomon
Sterling / Euro and US Dollar exchange rates
Following on from last week, the Pound rallied almost 1% against the U.S Dollar exchange rate on Thursday, trading at a high of 1.64 in early trading, bouncing back from the lowest level in 2-weeks, after the Senate’s decision to approve the increase in the U.S debt limit. The UK currency also gained as much as 2.8% versus the Swiss Franc, after Switzerland’s central bank cut interest rates in an effort to halt the currency’s relentless gains.
The Central Bank also threatened to take additional measures to quell the Franc’s strength after it rose to a fresh record high against the U.S Dollar, Pound and the Euro exchange rate. In the UK, a gauge of service sector growth rose unexpectedly in June, reducing concern that the economy is slipping into negative growth this quarter. The recent manufacturing and construction PMIs have been disappointing but the sense of renewed optimism following the services data is unlikely to last.
The Pound has swung between gains and losses in the past week, as investors assess whether economic data is so weak that policy makers will keep borrowing costs lower for an extended period. The National Institute for Economic and Social Research showed that the UK economy will expand less than previously expected this year with the full extent of the government cuts yet to be felt.
The Pound remained largely unchanged against the majors, as a measure of wage growth slowed in July from the highest level in 28-months. Incomes after tax and other reductions rose just 2.9% in the three months through July from a year earlier. Inflation has outpaced wage growth in the UK this year, causing a significant decline in consumer confidence and slowing the recovery.
Developments in the Euro-zone will remain an important focus and there may be further defensive support for Sterling if concerns over Italy and Spain intensify. However, market conditions remain volatile and a further tightening in banking sector liquidity would be a negative factor for the UK. Events in the UK have been over-shadowed by news events in the U.S and the Euro-zone, after the FTSE 100 index fell by the most in three years.
There was further nervousness surrounding the UK banking sector with weak results combined with further fears over a second credit crunch undermining confidence, particularly considering the potential impact on UK lending. The Halifax house price index recorded a 0.3% increase in prices for July but a separate from Rightmove Plc reported a further deterioration in buying support from first time buyers.
The level of volatility increased on Friday and the Pound hit a high of 1.6480 against the U.S Dollar, before retreating sharply later in the day. The UK currency made massive gains against the high-yielding currencies, rising again versus the Australian and New Zealand Dollars. ECB action to support Italian and Spanish markets has eased banking sectors and bring a level a stability to financial markets.
Events elsewhere will tend to dominate the market this week but in the UK the Bank of England is due to release its latest Quarterly Inflation Report on Wednesday. The report should provide some indication on monetary policy, as well as the MPC’s latest GDP and inflation forecasts. The growth outlook will probably revised lower, with the CPI projections likely to be revised in the opposite direction.
Euro / US Dollar exchange rates
There was an element of consolidation before the U.S non-farm payrolls data on Friday, with a reluctance to maintain aggressive positioning especially given further market turbulence in the Euro-zone. The headline employment data was slightly stronger-than-expected with a payroll increase of 117,000 for July, after a revised 46,000 increase the previous month.
There was further speculation that the U.S Federal Reserve will move towards additional quantitative easing over the coming months to support the ailing economy. The employment data was overshadowed on Friday by rumours of a U.S credit rating downgrade. After the close of trading, Standard Poor’s confirmed that it had downgraded the sovereign rating to AA+ from AAA with a negative outlook.
The downgrading immediately undermined support for the Dollar and only served to add to the volatility and uncertainty engulfing the market at the end of last week. In the Euro-zone, after a series of emergency meetings, the Italian government pledged to accelerate reform and the ECB announced that it would begin buying Italian and Spanish bonds in the secondary market.
Today’s Exchange Rate Data
EU 09:30 – Sentix Investor Sentiment (August)