by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound traded lower against the Euro exchange rate yesterday, falling back towards 1.1350, while the UK currency lost ground versus the majority of the 16 most actively traded currencies on concern that the UK economy will slip into negative growth during the third quarter. There is widespread speculation that the Bank of England are prepared to renew the bond-purchasing program through a means of quantitative easing, aimed at supporting the economy, while the Chancellor is warning that the recovery will “take longer and be harder” than previously thought.
Britain has been somewhat of a haven through the turmoil engulfing much of Europe and the U.S, but the UK’s appeal is waning severely, as the lowest inflation-adjusted bond yields on record scare investors. The problems in the UK have been highlighted with the worst civil unrest for 30-years in the past week and investors have responded to the worsening economic outlook by pulling their money out of the UK at the fastest rate in at least twenty years.
As a result, the Pound is weakening against the Euro, despite the deepening debt crisis in the Euro-zone, because consumer confidence is plummeting and the growth rate of the economy will lag behind that of Germany by more than two percentage points. The UK currency may weaken up to 8% against the Euro by the end of 2011 and the current price may represent a good opportunity to secure a rate converting Sterling to Euros. Some analysts are predicting that the rate of exchange will trade as low as 1.04 by the end of the year.
The governor of the Bank of England Mervyn King told reporters last week that the problems engulfing the UK economy are intensifying “by the day”. He said that “weakness in underlying activity is likely to be somewhat more persistent than previously expected.” The UK economy is still expected to grow 1.2% this year, lagging behind 3.4% in Germany and 1.8% in the U.S.
Despite the well-documented problems surrounding a contraction in growth in peripheral Euro-zone economies like Greece and Portugal, the European economy as a whole is expected to expand roughly 2% in 2011. UK gross domestic product increased just 0.2% in the second quarter and recent economic indicators suggest that the third quarter growth rate will be even lower.
The government’s aggressive austerity measures will probably stave off the threat of a cut in the UK’s AAA credit rating and the Chancellor George Osborne hailed the “credibility” of the plan in Parliament last week, showing no signs of adjusting the pace of the spending cuts. The escalating debt crisis in Europe and the U.S has only served as vindication for the biggest budget cuts in the post-war era.
The Bank of England has also kept interest rates at a record low of 0.5% and policy makers may embark on further quantitative easing to support growth, loosening policy even further. The Pound has declined 2.3% against the Euro on a trade weighted basis this year, even as the sovereign debt crisis spread, pushing borrowing costs in Italy and Spain to record levels.
A report in the UK this morning is expected to show that the pace of inflation edged higher in July to 4.3%, the highest level since records began in 1992. Consumer price growth is expected to peak above 5% this year, but the BoE fully expects the pace of inflation to undershoot the 2% government target over the next 12-months. Mervyn King will have to write his seventh consecutive letter explaining why officials have kept interest rates low over this period.
UK stocks rallied for a third consecutive day, the biggest three-day rally on the FTSE 100 Index since April 2009. The index eose 0.6% following reports that Japanese economic growth accelerated by more-than-expected during the second quarter. The subsequent improvement in global risk appetite saw the Dollar decline against the Pound and the rest of the majors, as traders sought higher-yielding currencies like the Australian Dollar and South African Rand.
The Pound peaked above 1.64 against the Dollar yesterday, before receding later in the day, while the UK currency recorded the largest gains versus the Swiss Franc, amid speculation that the Swiss National Bank will take further action to quell the currency’s recent gains. The Franc also declined heavily versus the Euro and the slid for a fourth day against the U.S Dollar.
Euro / US Dollar exchange rates
The Euro exchange rate declined against the vast majority of major currencies yesterday, before a report this morning that is expected to show that European economic growth slowed in the second quarter. The single currency fell from a three-week high, after data this morning showed that Germany’s economy barely grew in the three months to June.
The Euro encountered resistance in the region of 1.4450 before declining later in the day. In the U.S, the economic data was weaker-than-expected with the New York manufacturing index falling sharply on the month in July and this was the first time there has been two consecutive declines since 2009. There were also fresh concerns surrounding the U.S economic outlook, which limited demand for the Dollar.
The Australian Dollar exchange rate declined during the Asian trading session, after the minutes from the Reserve Bank’s last policy-setting meeting showed that officials kept interest rates unchanged on concern that the global economy may slow. The RBA also failed to dampen suggestion that the policy makers could cut interest rates to support the economy.
Today’s Exchange Rate Data
U.K 09:30 – Consumer Price Index (July) – RPI
U.K 09:30 – DCLG House Prices (June)
EU 10:00 – Trade Balance (June)
EU 10:00 – Flash GDP (Q2)
U.S 13:30 – Housing Starts (July) – Permits
U.S 13:30 – Export Prices (July) – Import Prices
U.S 14:15 – Industrial Production (July)