The Euro maintained a firmer tone against the Dollar and challenged near-term resistance levels in the region of 1.29.
by Adam Solomon
Sterling / Euro and US Dollar exchange rates
Following on from last week, the Pound continued to lose momentum against the Euro exchange rate, falling back towards 1.1950 in early trading on Thursday and from a technical perspective, the market seems to be edging lower with the main support level in the region of 1.1732. It is possible that the Pound will continue to depreciate versus the single currency, amid speculation of a contraction in economic growth during the fourth quarter and the possibility of further quantitative easing from the Bank of England next month.
Data last week showed that the number of Britons out of work and claiming jobless benefits had risen to 2.7 million in the quarter through November and government officials are becoming increasingly uneasy that the rising unemployment rate will push the economy into another recession. The Bank of England governor Mervyn King has reacted to the data by saying rising unemployment is threatening to cancel out the benefit of falling inflation on consumer spending and is threatening the economic recovery altogether.
The Pound continued to edge higher against the U.S Dollar exchange rate, however, as UK stocks rose for four straight days and the improvement in risk appetite reduced the appeal of the Dollar as a safe haven. The Euro rallied to the highest level in two weeks against the U.S Dollar, as positive auction results in Spain boosted optimism that the sovereign debt crisis is being contained.
The Pound maintained a firm tone against the Dollar, rising to a high above 1.55. Underlying confidence in the economic outlook remains very fragile and there were further long-term concerns surrounding the debt situation, as consumer credit levels remain high. There were also fears surrounding the banking sector, as balance sheets remained unsustainable from a longer-term perspective.
Although Euro-zone fears have eased slightly, there is still strong demand for UK bonds with benchmark yields remaining at record low levels following Thursday’s debt auction. While defensive demand remains strong, there will be scope for further underlying Sterling support even while the economic data continues to disappoint.
The Pound rose through 1.20 against the Euro exchange rate by the close of trading on Friday, after reaching a low of 1.1938, while the UK currency also rose further versus the Dollar, after a government report showed that UK retail sales increased in December, as stores cut prices in an attempt to attract consumers. Sales rose 0.6% from November, when they fell a revised 0.5% and from a year earlier sales were up 2.6%.
However, the near-term gain in sales may not last considering UK unemployment has continued to rise and inflation outpaces wage increases. Consumer confidence is bound to fall and with global growth cooling and the Euro-zone crisis weakening demand for exports, the UK economy is heading perilously for another recession.
There is a host of significant economic reports released this week with the focus falling on the preliminary GDP forecast for the fourth quarter. It is expected to show a moderate contraction in growth during the final three months of 2011, which would increase calls for more quantitative easing from the Bank of England and weaken the Pound.
Elsewhere, the CBI industrial and distributive trades surveys feature, along with consumer confidence and public finances data. The Bank of England January minutes will also be watched closely and although a unanimous decision to keep the bond-purchasing plan at £275 billion is expected, the tone and language used will be heavily scrutinised for signs that the MPC would extend quantitative easing measures next month.
Euro / US Dollar exchange rates
The Euro exchange rate maintained a firmer tone against the Dollar and challenged near-term resistance levels in the region of 1.29. The latest Spanish bond auction was once again stronger-than-expected in terms of investor interest, which helped underpin the Euro. A solid French auction also maintained expectations that the ECB’s bullish stance was having a positive impact on liquidity.
There was mixed economic data in the U.S with housing starts slightly below expectations at an annual rate of 0.66 million. In contrast, there was a sharp drop in weekly jobless claims to 352,000 from 402,000 previously, while the Philly Fed index edged lower on the month. Consumer price inflation was unchanged for December with core prices rising just 0.1% but the data had a muted impact in the market with swings in risk sentiment the domineering factor.
Although financial markets are largely being driven by swings in risk sentiment, the tone of the week could be set by the extent of progress in the talks to restructure Greece’s debt and whether a default can be avoided. The EU Head of State Summit begins today and in the U.S, the FOMC meets amid recent evidence that the U.S economy is improving.
Today’s Exchange Rate Data
EU – Eurogroup / Ecofin Finance Ministers Meeting (continues to Tuesday 24th)
EU 15:00 – Flash Consumer Confidence
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