by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound plunged against the U.S Dollar earlier today, falling almost 1.5% from the daily high of 1.6473, while the UK currency recovered initial losses versus the Euro to close well above 1.14 level. Sterling lost the most against the Swiss Franc, losing over 2% in value through the course of the day and dropping to the lowest level on record.
A report from the Chartered Institute of Purchasing and Supply showed that UK manufacturing unexpectedly contracted by the most in over two years last month. A measure of factory production fell below the line that indicates growth and to the lowest level since June 2009, while a gauge of business confidence also declined.
The decline in manufacturing was far worse than anticipated and suggests the inherent weakness in the UK economy may get worse before it gets better. Gross domestic product grew just 0.2% in the second quarter and the recent activity surveys point to even softer growth during the third quarter, sparking fears of a contraction and suggestions that further quantitative easing may be necessary.
The Confederation of British Industry has recently cuts its growth outlook for the UK economy. The lobby expects the UK to grow 1.3% this year, compared with previous estimates of 1.7%. As the economy struggles to gain momentum in the face of the most aggressive public spending cuts in a generation, the Bank of England is not expected to raise interest rates until June 2012.
The Bank of England Monetary Policy Committee will meet again this week and is expected to hold the bond purchasing program at £200 billion. Should policy makers decide to expand quantitative easing measures to support the economy, the Pound will come under heavy selling pressure. UK stocks declined for a second day yesterday, after manufacturing in the U.S expanded at the slowest pace in two years.
The benchmark FTSE 100 Index lost 0.7% by the close of trading last night, having earlier rose 1.7%. Risk appetite declined on concern that Europe’s debt crisis would spread to other high deficit nations like Italy and Spain, while concerns mount that U.S officials would fail to agree on increasing the federal debt limit. President Obama confirmed on Sunday that Republican and Democrat leaders in both the House and the Senate had reached an agreement to increase the debt ceiling by at least $2.1 trillion.
In the UK, the International Monetary Fund issued a generally downbeat assessment of the economy, although it also called for current economic policies to be maintained in order to rein in the budget deficit. Nevertheless, the Pound continued to gather momentum against the struggling Euro, bouncing back from an earlier slump, to trade well above the 1.14 level in volatile trading conditions.
Euro / US Dollar exchange rates
The biggest gainer of the day was undoubtedly the Swiss Franc, which rose to a record high against the Pound, Euro and U.S Dollar, as ongoing uncertainty in major economies sparked a flight to safety. The diminishing appetite for risk also saw the Canadian and Australian Dollars weaken, as global commodity and equity markets dropped.
The Dollar gained 1% against the Euro through the course of the day, as the ISM manufacturing index fell by more than expected last month, while the provisional agreement to raise the debt limit dampened U.S growth expectations. The Euro initially pushed to highs in the region of 1.4450 but was unable to sustain the momentum.
There will now be a vote in the Senate today before the increase in the debt limit is signed off by the President and there may be sense of relief that a default has been avoided. However, the lingering threat of a downgrade in the U.S credit rating from the AAA status will continue to undermine market sentiment. The ongoing concerns surround the structural vulnerabilities in the Euro-zone continue to undermine confidence in the Euro, with peripheral yield spreads widening again.
Spanish benchmark yields rose to near 6.20% through the course of the day, while Italian yields increased to close to 6%. The Euro weakened sharply through the course of the day and the ongoing fears surrounding the European banking sector will continue to weigh on sentiment. In terms of economic data, Euro-zone producer prices will likely indicate further upside risks to inflation.
Today’s Exchange Rate Data
EU 10:00 Producer Price Index (June)
U.S 13:30 Personal Income (June)
- Core PCE