The Euro was unable to remain above the 1.26 level against the Dollar on Monday and was generally weaker through the course of the day with lows close to 1.2530.
Sterling / Euro and US Dollar exchange rates
The Pound declined for the first time in five days against the Euro, while the UK currency bounced back above 1.57 versus the Dollar, albeit briefly, as concerns over the European and UK economic outlook continued to worsen. The latest Greek polls showed greater support for parties supporting a bailout, easing concern that the nation will exit the Euro, which also dampened demand for UK assets as a haven from the debt crisis.
The Pound declined against all but two of the 16 most actively traded currencies, before significant reports this week that may show consumer confidence plunged again in the figures for April, while manufacturing contracted, adding to pressure on the Bank of England to increase stimulus through quantitative easing. The revised GDP figures have revealed a deeper recession and the Pound may be on borrowed time, amid speculation that policy makers may act as early as June.
The Pound encountered strong resistance in the region of 1.57 against the Dollar and drifted weaker through the course of the day. After initially falling back towards 1.2450 versus the Euro, the Pound maintained a very firm tone and bounced back towards 1.25 last night. Bank of England policy maker Ben Broadbent expressed doubts surrounding the UK economic outlook.
His comments that the Euro-zone debt crisis was already having a negative impact failed to influence the market and the Pound stood relatively unchanged. He was, however, doubtful whether further quantitative easing would be effective and that current policy was appropriate for now. Although there will be a lively debate within the bank, markets will expect additional bond purchases if there is further short-term Euro-zone deterioration.
Safe haven considerations will remain a very important focus for the Pound in the near-term and there will be some speculation that defensive demand for Sterling is fading if UK bond yields do not follow Germany to record lows this week. In terms of economic data, the report this morning from the Confederation of British Industry is not expected to have a major impact in the market.
Euro / US Dollar
The Euro was unable to remain above the 1.26 level against the Dollar on Monday and was generally weaker through the course of the day with lows close to 1.2530. Trading conditions were relatively subdued with U.S markets closed for the U.S Memorial Day market holiday. There was some further relief following the Greek opinion polls with increased optimism that the pro-bailout parties would be able to secure a majority in the June 17th election.
Although such an outcome would lessen the immediate risk of a forced Euro-zone exit, there were still major fears surrounding the longer-term outlook given the unsustainable economic policies. The Spanish economy remained a very important focus with particular attention on the banking sector following the €19 billion bailout pledge for Bankia.
There were uncertainties how the funds would be raised and the government admitted that it would have difficulties funding itself. There were also rumours that other banks would require re-capitalisation. There was an underlying mood of pessimism directed at the Spanish outlook and the prospects of the Euro-zone as a whole.
Data Released Today
U.K 11:00 – CBI Distributive Trades Survey (May)
U.K 11:00 – Land Registry House Prices (April)
U.S 14:00 – Case Shiller House Prices (March)
U.S 15:00 – Consumer Confidence (May)
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