The Euro was unable to gain momentum against the Dollar on Friday and weakened towards 1.32 through the course of the day.
Sterling / Euro and US Dollar exchange rates
Following on from last week, the Pound strengthened by the most in four months against the Euro on Thursday, 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 in the UK showed that consumer confidence held steady at the strongest level 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. The recent injection of liquidity into the financial sector seems to equate to a strong Pound.
The Pound was up over 1% against the Euro by the close of trading on Thursday, 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.
The Pound continued to edge closer towards 1.20 versus the Euro on Friday and we feel this represents a good opportunity for Euro buyers who felt concerned by the recent depreciation towards a 12-week low at 1.1760. There is still the potential for the market to sell off once more and achieving a rate close to 1.20 could represent a good time to trade.
The Aussie Dollar gained against all of the 16 most actively traded currencies, as signs of an improvement in Chinese manufacturing boosted the outlook for exports in the region. In the UK, the latest PMI manufacturing data was marginally weaker-than-expected with the index edging down to 51.2 from 52 previously.
There was, however, some relief that the index stayed above the pivotal 50 level for the month to indicate growth in the sector and this helped to reduce expectations of another recession. There was also an increase in UK house prices according to the latest Nationwide survey. There continued to be a net reduction in expectations surrounding further quantitative easing, which helped support the Pound. There was also suggestions that the ECB would be more aggressive than the Bank of England in expanding monetary policy, which also helped underpin the currency.
Euro / US Dollar
The Euro remained in a tight trading range against the U.S Dollar, despite the improvement in risk appetite, which reduced demand for the U.S currency as a safe haven. The European unemployment rate rose to the highest level in 15-years of 10.7% for January, from a revised 10.6% the previous month. The Greek debt situation remained an important focus as the IDA ruled that the Greek private sector debt swap and the ECB bond swap did not constitute a credit event, which would trigger default payments.
There were also signs of further tensions between the ECB and the Bundesbank, as a letter between Weidmann and Draghi revealed policy disagreements. In the U.S, the jobless claims data recorded a small change at 351,000 in the latest week, while there was a small increase in personal spending. There was also a decline in manufacturing, although components of the report showed solid readings for new orders and employment. The Dollar gained some support against the Euro on yield grounds.
The Euro was unable to gain momentum against the Dollar on Friday and weakened towards 1.32 through the course of the day. There were further uncertainties surrounding Greece and particularly private sector debt restructuring. Spain also came into focus on Friday, as the government announced that the 2012 budget deficit would be revised to 5.8% of gross domestic product.
EU 08:58 – Markit Services PMI (February) – Composite
U.K 09:28 – CIPS Services PMI (February)
EU 09:30 – Sentix Index (March)
EU 10:00 – Retail Sales (January)
U.S 15:00 – ISM Non-Manufacturing PMI (February) – Business Activity
U.S 15:00 – Factory Orders (January)
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- The Euro strengthened against Sterling during trading yesterday