by Adam Solomon
Sterling / Euro and US Dollar Exchange Rates
The Pound remained in a tight trading range against both the Euro and the U.S Dollar exchange rates yesterday, as the market lacked direction due to the lack of significant economic data released. The UK currency continued to test resistance levels in the region of 1.63 versus the Dollar and slipped towards a low of 1.1310 against the Euro, ahead of the GDP data for the second quarter.
Earlier in the day, a report from Hometrack Ltd showed that UK house prices fell for a third straight month in July and are likely to continue falling over the coming months according to the group. The average cost of a home in the UK fell 0.1% from the previous month and was down 3.9% from a year earlier. Home values have fallen this year as weak demand undermined prices and the Bank of England has kept interest rates at a record low.
The Pound found support on dips towards 1.6265 against the Dollar with sharper falls averted by underlying concerns over the U.S debt ceiling. The latest mortgage lending data was marginally better-than-expected, but lending remained weak, which dampened confidence even further. The Business Secretary Vincent Cable called for more quantitative easing yesterday and although it was rejected by the Prime Minister, the government did concede that the economy faces challenging times ahead.
The Pound may struggle to remain in the ascendancy against the majors, as the report this morning is expected to show that the economy grew just 0.2% in the three months June, following a relatively subdued 0.5% expansion in the first quarter. The anaemic pace of growth has led to speculation that the UK economy could slip into negative territory this year, prompting talk that the Bank of England will leave interest rates on hold and possibly embark on further quantitative easing.
Downbeat rhetoric from government officials increased speculation over a weak GDP release this morning, which also undermined confidence in the Pound. The UK currency sank towards 1.1250 versus the Euro in early trading, while the UK currency also lost ground versus the majority of the 16 most actively traded currencies, amid speculation of a second quarter contraction.
Euro / US Dollar Exchange Rates
The Euro exchange rate encountered support in the region of 1.4325 against the U.S Dollar and made gains through the course of the day, as underlying U.S confidence remains weak. Discussions over the U.S debt ceiling continued to dominate throughout the course of the day, as officials struggled to find an agreement. Congressional leaders in the House of Representatives and the Senate continued to push alternative plans for longer-term budget cuts in order to secure an agreement.
The President Barack Obama warned over the risk of default in a statement last night, which only served to unsettle market confidence in the U.S economic outlook and the Dollar, particularly considering Obama has vowed to block any short-term increase in the debt ceiling. Given the focus on U.S debt, the structural vulnerabilities in the Euro-zone took a back seat for the day and the Euro took advantage as a result.
There will still be underlying concerns surrounding the Greek debt situation with the risk of a partial default, while there was an increase in peripheral yield spreads. The Italian Treasury also announced that it would cancel forthcoming August debt auctions, which increased unease over the debt situation. The vulnerabilities in the U.S will continue to dominate and the Euro rose very sharply to highs just above the 1.45 level following Obama’s comments.
Today’s Exchange Rate Data
U.K 09:30 – Prelim Gross Domestic Product (Q2)
U.S 14:00 – Case Shiller House Prices (May)
U.S 15:00 – Consumer Confidence (July)
U.S 15:00 – New Home Sales (June)