by Adam Solomon
Sterling / Euro and US Dollar Exchange Rates
Following on from last week, the Pound weakened against the majors, ahead of the Bank of England minutes, with lows near 1.6070 against the U.S Dollar. The UK currency bounced back from an early slump, after the report showed that only a few policy makers even considered an extension to the bond-purchasing program, alleviating concern that the BoE is about to embark on the next round of quantitative easing.
The threat of further bond purchases to support the fragile economy has undermined confidence in the Pound over the past few weeks. The UK currency subsequently rose 0.5% against the Euro, rising to a high of 1.1370 in London following the release of the data and achieving a high of 1.6170 versus the U.S Dollar. Officials voted 7-2 in favour of keeping interest rates unchanged at 0.5% and the majority conceded that recent economic developments and slowing inflation meant there was less need to raise interest rates in the short-term.
Martin Weale and the Bank’s chief economist Spencer Dale again voted for an immediate increase in rates and there were further warnings that inflation was liable to rise above the 5% level over the coming months. Consumer prices remained unchanged at 4.5% in June and there was a general feeling that economic weakness would see inflationary pressures begin to recede.
Money markets were relieved that the minutes omitted any talk of quantitative easing and Sterling rallied as a result. The Pound, however, failed to consolidate on the upward move towards 1.14 against the Euro, after Germany and France reached an agreement on addressing the Greek debt crisis. The Pound slipped back towards 1.1330 in early trading on Thursday, while the Euro also reached the highest level in a week versus the U.S Dollar.
The Pound also came under renewed selling pressure, as a report showed UK consumer confidence fell in June, while renewed optimism that the Euro-zone is nearing a deal to provide Greece with rescue funds renewed demand for the single currency. According to a report from the Nationwide Building Society, UK consumer confidence fell in June, as Britons became increasingly pessimistic about the outlook for the economy.
The Pound received a fresh boost towards the end of the week, after a report from the Office of National Statistics showed that UK retail sales unexpectedly rose in June. The decline in consumer confidence was expected to curtail the pace of spending on the high street, but sales rose 0.7% from May, despite high inflation and subdued wage growth.
In a separate government report, the UK budget deficit was larger-than-expected in June with the shortfall at £14 billion and the Chancellor George Osborne will face questions over whether the government can meet his deficit reduction targets this year. The most aggressive spending cuts in a generation combined with widespread public-sector job cuts haven’t done enough to rein in the deficit.
Despite the very evident impact on the UK economic outlook, the government is pressing ahead with the austerity measures designed to reduce the shortfall, which reached a record 11% of gross domestic product following the recession. The Pound remained higher against the Dollar following the data and even challenged resistance levels above 1.63 through the course of the day.
The Pound initially found support in the region of 1.6130 against the Dollar before rallying strongly during the U.S session. Uncertainty over the economic outlook in the UK will continue and there will be expectations of weak second quarter GDP data. The preliminary second quarter figures will be released on Tuesday and there will be some speculation over a renewed slump.
The UK economy probably grew just 0.2% in the three months to June, down from 0.5% in the first quarter and this result would reinforce the view that the Bank of England needs to focus on supporting the economy and leaving rates on hold. Elsewhere this week, house price surveys, as well as consumer confidence and bank lending data will feature but the Pound is likely to decline if the GBP data falls short of expectations and slips into negative growth.
Euro / US Dollar Exchange Rates
Last week, the Euro exchange rate surged to the highest level in two weeks against the U.S Dollar, as the threat of contagion in the Euro-zone eased and officials brought a sense of confidence back to the market. The single currency gained 1.5% to a high around 1.4430 on Thursday, as the French President Nicolas Sarkozy reiterated support for the Euro after the summit had ended.
In terms of economic data, the PMI manufacturing index fell in July by more-than-expected to the lowest reading for almost two years, while the services-sector index also dropped sharply on the month. The data, however, paled into the background because of the summit and suggestions that the European Central Bank would not block any deal to bailout Greece.
The EU leaders agreed on a support package totaling €109 billion and the fund will be expanded to have a bigger role in the future if needed to prevent contagion to other high deficit regions. In the U.S, there were further negotiations surrounding the U.S debt ceiling, but rumours of a deal were denied by Congress.
Last week’s announcement there we are nearing a resolution to the Euro-zone debt crisis has brought a sense of confidence back into the market and curtailed demand for the Dollar as a safe haven. With Europe agreeing new measures, the focus this week will switch to the U.S, as the 2nd August deadline for increasing its debt ceiling approaches.
Ironically, a successful outcome in the U.S should further enhance risk appetite, which should weaken the Dollar even further. In terms of economic data, the first estimate of U.S gross domestic product in the second quarter is due for release on Friday and growth is estimated to be exactly the same at 1.9% as in the first quarter.
There are also some key activity surveys in the form of consumer confidence and the Chicago PMI for June, while a number of housing reports feature through the course of the week. In the Euro-zone, consumer and business confidence for July are due for release, while the flash estimate of inflation for July is expected to show an increase in consumer prices this month.
Today’s Exchange Rate Data
No Data Released