by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound slumped to the lowest level in two weeks against the U.S Dollar yesterday and plunged to a fresh record low versus the Swiss Franc, amid escalating concern that the global economic recovery is slowing, which boosted demand for the lowest-yielding currencies as a haven. The Swiss in particular has been relentless this week, rising to record highs versus the Pound, U.S Dollar and the Euro.
A report yesterday from the Chartered Institute of Purchasing and Supply showed that UK construction weakened by more-than-expected in June. A gauge of building activity slipped to a reading of 53.5, down marginally from the previous month, but together with the manufacturing data on Monday, the figures indicate that the economy is slowing.
The grave state of UK economic data indicates that the economy may struggle to expand in the third quarter, leading to speculation of a near-term contraction in growth and the possibility of a second recession. The full extent of the government spending cuts has yet to be felt in the broader economy and the Pound will also be susceptible to speculation of further quantitative easing by the Bank of England.
Manufacturing unexpectedly contracted by the most in two years last month and although the Pound has benefited from the dual crisis in the U.S and the Euro-zone, the momentum is unlikely to last. The Confederation of British Industry has cut its growth forecast for the UK economy to just 1.3% this year and even that looks optimistic given the recent trend of UK fundamentals.
Amid ongoing tensions surrounding the structural vulnerabilities in the Euro-zone and the announcement of an increase in the U.S debt ceiling, the Bank of England interest rate announcement has faded into the background this week. The MPC is expected to announce no change in interest rates on Thursday and investors will be waiting hesitantly for any news on the prospect of an extension to the bond-purchasing program.
The Pound continued to slip against the safe haven currencies following the U.S announcement last night that the Senate had approved the increase to debt limit, which was signed off by President Obama yesterday. However, escalating market tensions meant the higher-yielding currencies like the Australian and New Zealand Dollars weakened against the Pound rising with the market rising above 1.50 against the Aussie, despite a strong indication that the Reserve Bank will raise interest rates over the coming months.
The Pound may come under further selling pressure this morning before a report that is expected to show growth in UK services industries slowed in June. The services data may provide yet another indication that the pace of the economic recovery is slowing in this quarter. However, the Pound has strengthened for three consecutive days against the Euro, as Spanish and Italian bond yields continue to rise, increasing the threat of peripheral contagion.
Elsewhere, the British Retail Consortium reported that UK shop prices slowed last month, as retail inflation eased and reduced the need to raise interest rates even further. Retail prices rose 2.8% from a year earlier, after advancing 2.9% in June and consumer confidence is plummeting as the government implements the most aggressive spending cuts to reduce the budget deficit.
Euro / US Dollar exchange rates
The Euro weakened sharply against the U.S Dollar to lows below 1.4150 yesterday, as risk appetite declined significantly later in the U.S session. Escalating tensions sweeping through financial markets was illustrated with the Libor-OIS spread increasing to the highest level in two years. Italian bond yields rose to the highest level in 14-years yesterday, while Spanish yields also increased sharply through the day.
Officials in Italy are due to hold emergency meetings today, while the Spanish Prime Minister has also stated that holiday plans would be postponed to monitor the current economic situation. There was speculation that the European Central Bank would be forced to intervene and buy peripheral bonds in the open market, as the focus shifts to Thursday’s press conference.
The U.S Senate approved the U.S debt ceiling increase and Obama’s signing of the legislation finally removed the threat of a U.S default. As a result, Moody’s affirmed the AAA credit rating for the U.S but there was no announcement from Standard and Poor’s. In terms of economic data, U.S personal spending slumped for the first time in two years, which helped maintain expectations of further slump in growth.
Today’s Exchange Rate Data
EU 08:58 Manufacturing Services PMI (July)
U.K 09:28 CIPS Services PMI (July)
EU 10:00 Retail Sales (June)
U.S 13:15 ADP Employment (July)
U.S 15:00 ISM Non-Manufacturing PMI (July)
– Business Activity
U.S 15:00 Factory Orders (June)