The Pound continued to advance to yearly highs against the Australian Dollar, New Zealand Dollar and South African Rand
Sterling / Euro and US Dollar exchange rates
The Pound continued to advance to yearly highs against the Australian Dollar, New Zealand Dollar and South African Rand yesterday, as swings in global risk sentiment persisted and has a major impact on the risk sensitive currencies. The UK currency has also maintained its aggressive upward swing versus the Euro, as concerns over Greece intensified.
There is still no resolution to the political deadlock and some semblance of government still remains elusive. As a result, the Euro has declined heavily against the majors, trading under 1.29 versus the U.S Dollar. Despite the UK economy drifting into a double-dip during the first quarter, the Pound is being viewed as an attractive alternative to the Euro for investors.
The Pound has appreciated 3.6% this year and 7.5% against the Euro since October, despite the amount of stimulus introduced by the Bank of England. A strong Pound may undermine efforts to bring the UK economy out of contraction with about 47% of UK export sales in Europe. As the Pound strengthens, exports will become less competitive from the UK and undermine the growth outlook.
Safe haven considerations will remain the dominant influence on Sterling, as rumours and speculation continued to swirl around the Euro-zone with the threat of a Greek exit. There is evidence of notable capital inflows into the Pound again with the UK 10-year benchmark yields falling to record lows. The Pound found support close to 1.6050 against the Dollar and broke through 1.25 versus the Euro.
There will still be the risk that a deterioration in wider risk appetite will undermine confidence in the Pound, especially with doubts surrounding the banking sector. The Pound is being protected by the fact that the sovereign debt risk is extremely low, but wider doubts over the UK economic outlook could trigger intense selling pressure.
The Bank of England inflation report will be watched extremely closely on Wednesday and the MPC must justify to officials why they stopped expanding quantitative easing measures even as the outlook for Europe’s economy worsened. The governor Mervyn King will present economic forecasts and there is a concern that if the Pound strengthens further it will increase pressure on the economy.
Euro / US Dollar
The Euro remained under pressure yesterday, retreating to fresh 4-month lows below 1.2825 against the Dollar, as Greek and wider Euro-zone fears dominated. The political deadlock in Greece spilled over from the weekend with fears that political paralysis and opposition to austerity measures would result in Greece being ejected from the Euro-zone.
There were a series of warnings yesterday from EU officials that Greece needed to meet the loan conditions in order to receive continued funding. There were also concerns surrounding Spain and the banking sector, as an increase in benchmark Spanish bond yields to above the 6.3% level, while the spread over German bunds widened to a record high.
Moody’s Investor Service also announced a credit-rating downgrade of 27 Italian banks, which reinforced fears surrounding the banking sector. There was a sharp decline in equity markets, which helped trigger further Euro losses against the Dollar, amid a wider deterioration in risk appetite. This morning, the German first quarter growth figures provided a degree of relief of the Euro.
Data Released Today
U.K 09:30 Trade Balance (March)
EU 10:00 Flash GDP (Q1)
GER 10:00 ZEW Index (May)
U.S 13:30 Retail Sales (April)
U.S 13:30 Empire State / NY Fed Manufacturing Index (May)
U.S 14:00 Net Capital Inflows (March)
U.S 15:00 Business Inventories (March)
U.S 15:00 NAHB House Builders’ Sentiment (May)
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