by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound traded close to a three week low against the U.S Dollar yesterday, while the UK currency made strong gains versus the Euro, Swiss Franc and Australian Dollar. The level of volatility engulfing financial markets is set to continue amid escalating concerns over the threat of contagion in the Euro-zone and speculation that the U.S economy is entering a renewed slump.
The UK finance minister George Osborne addressed parliament yesterday and reassured investors that the UK won’t suffer a credit rating downgrade like the U.S and possibly France. The Chancellor also rebuffed opposition demands to review the spending cuts and the deficit reduction plan, as the debt crisis in Europe increased the volatility in global equity markets.
The worst civil unrest in 30-years has been largely blamed on the public spending cuts, which has increased public-sector job losses and seen consumer confidence plummet to the lowest level in years. The Pound strengthened against the Euro yesterday, bouncing back from an earlier low of 1.1310, to peak above 1.14 by the close of trading last night.
The Bank of England’s quarterly inflation report was a stark warning that the economic outlook is worsening. The UK economy barely grew in the second quarter with 0.2% growth and the recent economic indicators point to even slower expansion in the third quarter. Therefore, the prospect of a second recession in three years has increased significantly, which has led to speculation that the BoE will embark on further quantitative easing measures.
Although the government is stubbornly backing the deficit-reduction plan at this stage, it will be interesting to the see how the coalition party will react if the economy slips into negative growth later this year. Following Osborne’s statement yesterday, the Pound appreciated against 8 of the 16 most actively traded currencies.
With the U.S economy downgraded from the AAA status and the Euro-zone debt crisis spreading, the UK has become a relative safe haven for investors from the turmoil. The Pound appreciated 0.4% against the Dollar last night, despite the lack of confidence in the UK economy, especially with the Bank of England likely to keep interest rates low for longer.
The UK banking sector will be watched closely over the coming weeks and the Pound will be vulnerable to further selling pressure if there is any evidence of a deterioration in credit conditions. A report early this morning showed that UK house prices fell to the lowest level in more than 18 months in July, as tighter credit conditions deterred first-time buyers.
Euro / US Dollar exchange rates
The Euro is poised to record a second consecutive weekly drop against the Dollar this week, before reports are expected to show an expansion in industrial production in the Euro-zone and Greece’s economy contracted. The single currency is also set for its biggest weekly drop in three months versus the Japanese Yen, amid speculation that the ECB will be forced into cutting interest rates to support growth.
Volatility in financial markets remains extremely high and both the Euro and the Dollar are struggling to gain support, amid concerns surrounding structural vulnerabilities in both economies. There was further buying of Italian and Spanish bonds by the ECB on Thursday, which helped keep yields down, although credit-default swaps in France continued to rise.
In the U.S, the number of Americans filing for first time unemployment benefits was marginally less-than-expected with a decline of 395,000, from 402,000 previously. The trade data showed that the deficit increased to $52.1 billion in June, as exports registered the biggest decline in two years, underlining concerns about the economy.
Today’s Exchange Rate Data
EU 10:00 Industrial Production (June)
U.S 13:30 Retail Sales (July)
U.S 14:55 Michigan Sentiment (August Prelim)
U.S 15:00 Business Inventories (June)