Pound to Euro and US Dollar: The Pound strengthened by the most in four months against the Euro exchange rate

Foreign Exchange Rates Currency News - The Pound rallied towards the highest level in three weeks against the US DollarThe European Central Bank announced that €530 billion was allocated in the second long-term refinancing operation, which was slightly higher-than-expected and compared with €489 billion figure last time.

Sterling / Euro and US Dollar exchange rates

The Pound strengthened by the most in four months against the Euro yesterday, rising up through 1.19 and bouncing back from the lowest level in 12-weeks. The European Central Bank loaned a record amount of funds to Euro-zone banks in an effort to boost liquidity, fuelling speculation that financial sector earnings will boost the UK economy and help avoid a technical recession this quarter.

The Pound also gained for a second day against the U.S Dollar, rising through the 200-day moving average on the way towards a high of 1.5970. A move to test resistance levels at 1.60 seemed inevitable until the Dollar received a boost following comments from the Federal Reserve Chairman Ben Bernanke. He played down the potential for additional stimulus measures to be introduced and said the Fed will continue to monitor economic trends.

A report earlier in the UK showed that consumer confidence held steady at the strongest since June, while mortgage approvals increased by the most in two years, adding to speculation that the economy will avoid a recession following a contraction in growth during the fourth quarter. We could interpret today’s move that the injection of liquidity into the financial sector equates to a strong Pound.

The Pound was up over 1% against the Euro by the close of trading last night, as the single currency continued to weaken, while there was some relief that the Bank of England expanded money supply growth in the latest data. There were inevitably mixed comments in the Bank of England parliamentary testimony on the inflation report.

The Governor Mervyn King remained very anxious surrounding bank capital levels, but also stated there was still uncertainty surrounding further quantitative easing. BoE members Paul Tucker and Charles Bean expressed some concern over the inflation outlook, while their colleague Martin Weale was more forthright in stating that he did not see the case for further easing, which provided a degree of Sterling support.

There will be speculation that the current round of bond purchases sanctioned earlier this month will be the end of the plan and Weale believes that persistent inflationary pressures will make further stimulus unlikely. Higher oil prices and potential wage increases as the economy recovers from the fourth quarter slump does suggest that consumer prices may be resilient and remain well above the 2% target.

Euro / US Dollar

The European Central Bank announced that €530 billion was allocated in the second long-term refinancing operation, which was slightly higher-than-expected and compared with €489 billion figure last time. There was a surprise in the number of banks which took part as more than 800 institutions took funds in the operation, up from 500 last time.

The injection of liquidity helped maintain risk appetite initially, but there was a more cautious tone later in the day following comments from the Fed Chairman Ben Bernanke. The Euro was also undermined by the measure of quantitative easing and by further doubts surrounding the banks’ balance sheets and exposure to bad debts. There was also a sharp increase in Portuguese bond yields, which curbed support for the Euro.

In the U.S, the economic data was marginally stronger-than-expected with fourth quarter GDP revised higher to 3%, from 2.8% previously. Bernanke was slightly more optimistic surrounding the economic outlook with comments that unemployment was falling faster than expected. He maintained that an aggressive monetary policy stance was justified, but he also said there would be no immediate need for further quantitative easing.

Data Released

EU 08:58 – Markit Manufacturing PMI (February)

U.K 09:28 – CIPS Manufacturing PMI (February)

EU 10:00 – Final HICP (February)

EU 10:00 – Unemployment (January)

EU 13:30 – Personal Income (January) – Core PCE

U.S 13:30 – Initial Jobless Claims (w/e 25th February)

U.S 15:00 – Construction Spending (January)

U.S 15:00 – ISM Manufacturing (February)

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