The Pound declined through 1.61 against the U.S Dollar yesterday, after a report from the Confederation of British Industry showed that UK retail sales slumped in April.
Sterling / Euro and US Dollar exchange rates
The Pound declined through 1.61 against the U.S Dollar yesterday, after a report from the Confederation of British Industry showed that UK retail sales slumped in April. The declining nature of recent UK economic data will spur concerns that the UK recession may be deeper than the preliminary reports and that could prompt the Bank of England to re-consider implementing additional stimulus measures through quantitative easing.
The Pound has dropped to a two-week low against the Dollar, but has remained resilient versus the Euro and a basket of currencies. The Euro is feeling the strain from the economic and political uncertainties within the Euro-zone, with speculation mounting that Greece will lead a Euro-area exit. The single currency slipped under the pivotal 1.30 level against the Dollar and it seems likely we’ll see a test of resistance in the region of 1.2550 versus the Euro before too long.
Overall, the Pound is trading at 2012 highs against a basket of currencies, which is very attractive for those of you looking to sell Sterling. However, a word of caution – the UK economy is technically in a recession and the idea of further quantitative easing if the contraction proves deeper is still on the table. It would be naïve to think this rally could continue indefinitely and these rates that we haven’t seen for months, even years in some cases, may prove very attractive in the months ahead.
There was further evidence of defensive inflows into Sterling as a safe haven from the stresses in the Euro-zone. The latest UK government bond auction recorded a drop in 30-year yields compared with the previous sale while there was an increase in the bid/offer ratio. There may be an element of caution today with the Bank of England interest rate announcement at midday.
Given the remote possibility of further quantitative easing to support the UK economy that is technically in a recession, the Pound may decline in the build up to the announcement. Markets overall expect the BoE will keep the amount of quantitative easing on hold and a decision to keep policy unchanged would provide a boost to Sterling.
The Pound pushed to a high of 1.2450 last night, the highest level since November 2008, while the UK currency recovered back towards 1.6150 versus the Dollar. The defensive demand for Sterling as an alternative to the Euro may outweigh any potential for an increase in stimulus measures. There is also a report this morning on UK industrial production and the GDP estimate from the National Institute for Economic and Social Research.
The Pound advanced through 1.60 against the Australian Dollar last night, albeit briefly, after the nation’s jobless rate dropped to the lowest level in a year last month. The Aussie was also subjected to fresh selling pressure, after a report showed lower-than-estimated export and import growth in China. The New Zealand Dollar bounced back from the recent low, halting an eighth consecutive daily decline.
Euro / US Dollar
The Euro struggled to get back above the 1.30 level against the Dollar yesterday and was again subjected to heavy selling pressure through the course of the day. The Greek political situation was again under heavy scrutiny with further attempts to form some semblance of government. The Euro weakened amid speculation that the EFSF loan payment to Greece may be delayed today.
There was also speculation yesterday that the Spanish government would take a majority stake in Bankia with further capital injections into the banking sector as a whole. Confidence in the Euro-zone will remain extremely fragile. The increase in risk aversion is likely to continue to support the Dollar, as its safe status makes it attractive for investors with confidence lower.
Data Released Today
EU 09:00 ECB Monthly Bulletin (April)
U.K 09:30 Industrial Production (March)
– Manufacturing Output
U.K 12:00 BoE Policy Announcement
U.S 13:30 Trade Balance (March)
U.S 13:00 Weekly Jobless Claims (w/e 5th May)
U.K 15:00 NIESR GDP Estimate (April)
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