by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound declined against the Euro and the U.S Dollar yesterday, while the UK currency also fell to yet another record low versus the Swiss Franc. The Bank of England’s quarterly inflation report showed that the economic outlook is worsening in the UK and the governor Mervyn King gave an indication that policy makers can expand monetary stimulus at any time if growth deteriorates further.
It is beginning to looking increasingly likely that the economy will slip into negative growth in the third quarter and that may prompt the BoE to begin bond-purchasing again through a means of quantitative easing. A level of stability has returned to the market following a volatile few days, as global risk appetite improved following the rise in global equity markets.
The higher-yielding currencies subsequently gained ground versus the majors and the Swiss Franc sold off from a record high, as the Swiss Central Bank pledged to implement further measures to weaken the currency. The Pound encountered strong resistance in the region of 1.63 against the U.S Dollar and maintained a weaker tone through the course of the day.
The Bank of England also downgraded its growth forecasts for 2012, cutting it to around 2% from 2.5% previously. The GDP estimate of 1.4% for 2011 seems too overly optimistic at present and there is a likelihood that it will be downgraded further. The governor Mervyn King also warned that inflation is likely to rise above 5% over the coming months, before receding next year.
The Pound recovered from initial losses against the U.S Dollar after the report, but was subjected to fresh selling pressure later in the day, as risk appetite deteriorated with lows near 1.6120. UK stocks resumed their retreat towards the close of the European session, led by a sell-off in banking shares, as the cost of insuring French debt rose to a record level.
There is widespread speculation that France will suffer a downgrade in its AAA credit rating, renewing concern that Europe’s sovereign debt crisis is spreading to the larger economies in the Euro-zone. RBS Plc and HSBC Holdings Plc lost more than 5% in London trading, as the benchmark FTSE 100 Index tumbled more than 3.1%.
Global stock markets rallied earlier in the day, after the Federal Reserve pledged to keep interest rates low until the middle of 2013. The short-term relief didn’t last too long and the volatility engulfing world markets continued with aggressive swings in risk sentiment having a big impact on exchange rates. The Pound traded down to a low of 1.6114 against the Dollar and 1.1340 versus the Euro in choppy trading conditions.
Euro / US Dollar exchange rates
The Dollar declined against the Euro yesterday, as futures markets indicated that a rally in U.S stocks will boost demand for higher-yielding currencies. The mood optimism didn’t last long, however, and the Dollar bounced back towards the close of trading last night. The Euro was unable to push above 1.44 against the Dollar, amid fresh concerns surrounding the Euro-zone financial sector.
The three main credit rating agencies stated that the rating for France was secure with a stable outlook for now but credit-default swaps rose again during the course of the day, stoking concern about an imminent downgrade. There were further strains in the money markets as dollar Libor rates increase to a four-month high around 0.28%.
There was a wider deterioration in risk appetite during the U.S trading session, as global equity markets tumbled again, triggering some defensive demand for the Dollar as a haven. The U.S economic data will be watched closely today for a further expansion in the trade deficit and further speculation that the Fed will embark on further quantitative easing measures to support growth.
Today’s Exchange Rate Data
EU 09:00 – ECB Monthly Bulletin Published
U.S 13:30 – Initial Jobless Claims (w/e 6th August)
U.S 13:30 – Trade Balance (June)