The Euro initially found support in the region of 1.3050 against the U.S Dollar and staged a brief rally before hitting strong resistance at 1.31.
Sterling / Euro and US Dollar exchange rates
Following on from last week, the Pound advanced towards 1.5850 against the U.S Dollar and continued to make strong gains versus the Euro with resistance in the region of 1.2055. However, there has been a fundamental lack of appetite for the Pound above 1.20 versus the Euro this year and it may not last too long, especially since Fitch Ratings Agency downgraded the UK economic outlook to ‘negative’ on Thursday.
The UK employment data recorded a 7,200 increase in the claimant count, from a revised 7,000 increase the previous month. The jobless rate remained unchanged at 8.4% and there was a further decline in average earnings growth to 1.4% from 1.9%. The report will maintain fears that consumer spending would come under further pressure over the coming months and weigh on the economy.
The broadest measure of unemployment remained at the highest level in 16-years, underscoring the weakness in the labour market even as parts of the economy show signs of recovery. The labour market data will also fuel concerns that the government is cutting spending too quickly in an effort to curb the budget deficit.
The UK economy contracted in the fourth quarter but recent economic surveys have pointed to a revival in services and manufacturing in the early part of this year, which means we may avoid a technical recession. There is also talk that the Bank of England will refrain from implementing further quantitative easing beyond the current round of bond purchases and that would tend to boost the Pound.
However, the uncertainty surrounding the Euro-zone and the possible impact the debt crisis is having on the UK means that a slowdown in growth is still a big possibility and policy makers may need to act once more to support the economy. Consumer confidence remains weak on concern that job cuts may continue at the same pace over the coming months.
The Pound weakened against the Euro for the first time in three days on Friday, dropping back under the 1.20 level, following reports that Fitch ratings indicated the UK is at risk of losing its top level credit rating. The UK currency also declined towards 1.5640 versus the U.S Dollar and recorded losses versus the majority of the 16 most actively traded currencies, after Fitch chasing its rating outlook for the UK economy to negative, citing a weak economic performance in the fourth quarter and high levels of debt.
The prospect of a credit rating downgrade will be a concern to the government, who have been on a crusade to rein in the budget deficit over the past year at the expense of consumer confidence. There is a plethora of economic data in the UK this week with the focus falling on the MPC minutes for the March meeting.
The market expects the minutes to show that the decision to maintain the current level of bond purchases was unanimous. There will still be a high degree of interest in the tone of the discussions, as policy makers have shown a wide range of views over the past few weeks. The Chancellor of the Exchequer George Osborne is due to deliver his 2012 budget on Wednesday.
Euro / US Dollar
The Euro initially found support in the region of 1.3050 against the U.S Dollar and staged a brief rally before hitting strong resistance at 1.31. The Dollar maintained a robust tone on swings in risk appetite and a shift in monetary-policy expectations. The Euro-zone economic data didn’t have a major impact on the market with the flash inflation rate unchanged at 2.7% for February.
There was also a marginal increase in the industrial production data for the month, which was below expectations. Confidence in the Euro-zone economy will remain very fragile and there were expectations that the ECB would have to maintain a very expansionary policy to bolster domestic demand. There was also a further decline in Italian bond yields to the lowest level since the fourth quarter of 2010.
There was a further increase in U.S treasury yields during the day following the FOMC rate announcement on Tuesday, which supported the Dollar on interest rate grounds. The U.S currency maintained a firmer tone through the course of the day with the Euro testing support in the region of 1.30 before correcting higher.
U.K 00:01 – Rightmove House Prices (March)
EU 09:00 – Current Account (January)
U.S 14:00 – NAHB House Builders’ Sentiment (March)
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