by Adam Solomon
Sterling / Euro and US Dollar exchange rates
Following on from last week, the Pound bounced back against the U.S Dollar on Wednesday, rising for the first time in four days, albeit briefly, after a report from the Office of National Statistics showed that UK unemployment claims increased by less-than-expected in August. Public sector jobs plummeted 111,000 in the three months to June but the smaller decline in jobless claims is a result of the improvement in private-sector job growth.
The government plans to eliminate 330,000 jobs over a four year period, as part of the deficit reduction plan. The Pound lost ground for a third day against the Euro, trading back under 1.15 in what can be described as a corrective recovery from the previous week’s upward move to a 4-month high. Appetite for Sterling will be limited amid speculation of further quantitative easing and a contraction in growth during the third quarter.
The Bank of England kept interest rates on hold at 0.5% this month and policy makers are expected to renew the quantitative plan by November to support the economy. MPC member Adam Posen said last week that the outlook for the economy had worsened and his colleagues should back his call for more stimulus measures to be introduced.
Posen indicated that he may double his recommendation for bond purchases and will intensify the debate within the MPC to add more stimulus. He has voted for a £50 billion increase in the bond plan every month since October and said the BoE needs to buy as much as £100 billion of securities within three months or the economic outlook will worsen.
The claimant count rate was 4.9% in August and the number of people receiving unemployment benefits was 1.58 million. The UK economy barely grew in the second quarter at a revised estimate of 0.2% from the previous month and a measure of factory production, services and construction have all declined in August, making a contraction all the more likely.
The unemployment rate held steady at 7.9% despite the number of unemployed people increased by 80,000 to 2.51 million. The government is hoping that the private sector will help mitigate the drop in public sector jobs over the next four years but there is pressure on banks to cut jobs. The biggest global banks are cutting jobs at the fastest pace since 2008, as a slowing global economy hurts revenue.
The Pound found an area of support in the region of 1.57 against the U.S Dollar and rallied through the European trading session with a peak above 1.58. Underlying confidence in the UK economy will remain extremely fragile, amid fears that there would be a further deterioration in consumer confidence, while there was significant unease surrounding the banking sector.
The Pound fell dramatically against the Euro on Thursday, trading back towards 1.1350, while the single currency also made widespread gains against the majors, including the U.S Dollar, after the European Central Bank announced that it would be increasing Dollar liquidity to banks in an attempt to help resolve the sovereign debt crisis.
The announcement added significant support to the Euro, just a day after Germany and France pledged to support Greece, amid speculation that the struggling nation would be ejected from the EU. Euro buyers have watched the Pound depreciate for four days consecutively this week, a trend that may continue over the coming days, amid a renewed appetite for Euro-denominated assets.
The Pound found support on dips towards 1.5720 against the U.S Dollar and spiked higher through the course of the day on a revival in risk appetite. Developments within the Euro-zone tended to dominate market sentiment, but there remains a distinct lack of confidence in the UK economy, which was emphasized by the poor retail sales numbers.
The report from the Office of National Statistics showed that sales, including fuel declined 0.2% in August, falling for the first time in three months on declining consumer confidence. UK consumer spending was hurt by rising inflation at 4.5%, almost twice the pace of wage growth, while the worst civil unrest in major UK cities almost impacted on sales.
The government spending cuts have also restrained the recovery and is forcing the Bank of England to discuss the possibility of extending quantitative easing to pump more stimulus into the economy in order to prevent a contraction in growth. The BoE said in a report last week that household inflation expectations climbed to the highest level in three years last month.
The latest Rightmove house price index recorded an increase of 1.5% for September, after a 0.3% decline the previous month. Euro-zone trends tended to dominate and the report had a mixed impact on the Pound. The UK currency has also benefited from a being a safe haven from the turmoil that has engulfed the Euro-zone but there are fears that there would be substantial economic damage to the UK if Euro-zone difficulties intensify.
In the UK this week, the highlight will be Wednesday’s release of the minutes of the September Bank of England policy meeting. No change in the voting pattern is expected from the previous, although the tone of the discussions will be closely watched given the recent comments from Adam Posen and Martin Weale.
Euro / US Dollar exchange rates
The Euro found support close to 1.37 in early trading on Thursday and rocketed higher later in the day, as the ECB and Federal Reserve, along with other central banks, announced a new three-month dollar loan facility. The ECB will be in a position to provide Dollar liquidity to European banks with funds secured from the Federal Reserve.
The move has eased concerns of a liquidity crisis within the Euro-zone and there was an immediate improvement in risk appetite following the announcement. The facility will also curb demand for U.S Dollars in the open market. There is still unease over the Euro-zone outlook with strong speculation that Greece would default.
On Friday at the ECOFIN meetings, the U.S Treasury Secretary Timothy Geithner called for a stronger response from European leaders to quell the debt crisis and he also suggested that the EFSE facility could be leveraged to give it greater power in boosting bond purchases. There were increased political divisions within the Euro-zone and there were no major policy initiatives during the day.
Money markets will remain on alert for any developments in the Euro-zone this week, as politicians continue to try and address the problems with debt levels. The Euro will remain vulnerable to further selling pressure, despite last week’s improvement. In the U.S, the Dollar could come under scrutiny in the early part of the week with the FOMC interest rates announcement.
Today’s Exchange Rate Data
U.S 20:00 NAHB Housing Market Index (September)