by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound rallied almost 1% against the U.S Dollar, trading at a high of 1.64 in early trading, bouncing back from the lowest level in 2-weeks, as the Senate’s decision to approve the increase in the U.S debt limit spurred demand for riskier assets. 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. 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 yesterday’s data is unlikely to last.
The Pound has swung between gains and losses this 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’s two-day advance against the U.S Dollar is under threat today before the Bank of England interest rate decision at midday. The UK currency is also weakening for a second day against the Euro, as the MPC is expected to keep interest rates unchanged at 0.5% and there will be widespread speculation over a possible extension to the bond-purchasing program.
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. The Pound may come under further selling pressure in the build-up to the midday announcement but there may be an element of relief if officials keep bond purchases on hold.
Euro / US Dollar exchange rates
The Dollar declined against the Euro for a second day amid speculation that the Federal Reserve will consider increasing monetary stimulus to counter a slowdown in the U.S economy. The prospect of further quantitative easing would tend to undermine the U.S currency and the Dollar subsequently dropped against the majority of the 16 most actively traded currencies.
The Euro found support in the region of 1.4150 against the Dollar and advanced strongly through the course of the day. There were still concerns surrounding the threat of contagion in the Euro-zone as peripheral bond yields in Italy and Spain continued to increase, after rising to the highest level in 14-years the previous session.
Italian yields rose to a high above 6.25% before some moderation towards the close of trading, as meetings took place between the Italian authorities and the EU Commission. The ECB meeting will be watched closely today with comments on the economic outlook, interest rates and peripheral bond purchases. The tone and language used in Jean-Claude Tirchet’s statement will take on added significance for the Euro outlook.
Today’s Exchange Rate Data
GER 11:00 Industrial Orders (June)
U.K 12:00 BoE Interest Rate Announcement
EU 12:45 ECB Interest Rate Announcement
EU 13:30 ECB Press Conference
U.S 13:30 Initial Jobless Claims (w/e 30th July)