by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound fell dramatically against the Euro yesterday afternoon, 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.
Stocks and equity futures markets also rallied on speculation the ECB would coordinate with other central banks around to the world to extend three month loans to European banks in an effort to ensure they have enough liquidity for the rest of the year.
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 yesterday that household inflation expectations climbed to the highest level in three years last month.
Bank of England policy member Martin Weale said yesterday that the risks of another recession had increased, while his colleague Bean commented that inflation would decline next year, reducing the need for a rate increase and weakening demand for the Pound. There is also speculation that policy makers will eventually move to sanction further QE by November.
Euro / US Dollar exchange rates
The Euro found support close to 1.37 in early trading yesterday 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.
The U.S economic data offered little support to growth prospects over the coming months with the New York State manufacturing figures falling again in September, while the Philly Fed index also remained at a level well below zero. There was also an increase in U.S initial jobless claims to 428,000 in the latest week, from 417,000 previously.
Today’s Exchange Rate Data
EU 09:00 – Current Account (July)
EU 10:00 – Labour Costs / Wages (Q2)
U.S 14:00 – TICS Net Capital Flows (July)