by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound lost some momentum against the Euro yesterday, trading back towards 1.1450 in London, as gains in European stock markets boosted demand for Euro-denominated assets. There are tentative signs that talks aimed at preventing a Greek default are finally making some progress and the Euro made widespread gains against the majors.
The Pound continues to trade lower against the U.S Dollar and a move towards the 50% Fibonacci retracement level at 1.5490 seems increasingly likely, which would indicate that further losses are probable over the coming weeks. The Pound is trading just above the lowest level in eight months against the Dollar, before the minutes of the Bank of England’s September meeting are released this morning.
The Monetary Policy Committee voted to keep interest rates on hold at 0.5% this month but the minutes may reveal discussion on whether the committee is preparing to extend quantitative easing measures to support the economy. Adam Posen has already announced earlier this month that he has increased his vote to £100 billion of stimulus to be introduced and it is now down to whether any of his colleagues joined him.
The Pound is trading lower against 13 out of the 16 most actively traded currencies, after a report earlier today from the Nationwide Building Society showed that a gauge of consumer confidence slumped to the lowest level in four months for August. An index of sentiment slumped 1 point from the previous month to represent the lowest reading since April, as consumers became increasingly pessimistic about the outlook for the economy.
Nationwide said that it’s “encouraging” that confidence didn’t fall even further considering the UK suffered the worst civil unrest in thirty years in August, while the sovereign debt crisis in Europe shook financial markets. UK manufacturing, services and construction have all declined in the past month, while inflation has outpaced wage growth, putting pressure on consumers at a time when the government spending cuts are increasing the level of joblessness.
Robert Gardner, Nationwide’s chief economist, said that “the relative stability is probably a reflection of the already subdued level of confidence, rather than indicating resilience in the household sector. With the economic outlook still challenging, confidence is likely to remain in the doldrums for some time yet.” The Pound fell below 1.57 against the Dollar following the report, after a staging a modest recovery on risk sentiment towards the close of trading last night.
The International Monetary Fund has lowered its growth forecasts for the UK for the next two years, which also weighed on the Pound and increased the overall concern about the economy, especially as there may be a negative impact on government finances. The 2011 estimate was cut to 1.1% and the 2012 forecast was dramatically cut to 1.6% from 2.3% previously.
There is also market tensions following the Financial Times assessment that the structural budget position was actually weaker-than-expected. The Pound is likely to come under further selling pressure against the majors today, especially if the Bank of England minutes increases market speculation that the MPC will extend bond purchases over the coming months.
Euro / US Dollar exchange rates
The Euro maintained gains against the U.S Dollar yesterday, after Greece held a second round of talks with the European Union and International Monetary Fund, which served to limit the potential risk for a Greek default. The Euro traded back above 1.37 against the U.S Dollar yesterday, as reports of a referendum on Euro membership was strongly denied by the Greek government.
There was still evidence of serious division within the Cabinet, which may make it difficult to actually impose further austerity measures to secure the next tranche of aid. Underlying confidence in the Euro-zone will remain fragile, especially with concerns surrounding the Italian economy, as credit default swaps continued to rise.
There were also further fears surrounding the European banking sector following reports that Chinese banks had withdrawn credit lines, while dollar libor rates continued to increase. The German ZEW business confidence index weakened in September, although the result was slightly better-than-expected with some caution that conditions may be stabilising.
In the U.S, the decline in housing starts didn’t have a major market impact, as developments in the Euro-zone continues to take the market’s attention. There is a degree of caution ahead of the Federal Reserve FOMC meeting today and there will be expectations that the Fed will look to keep interest rates at ultra-low levels for longer, while speculation for further quantitative easing could undermine the Dollar.
Today’s Exchange Rate Data
U.K 00:01 Nationwide Consumer Confidence
U.K 09:30 PS Net Borrowing (August)
U.K 09:30 Minutes BoE Policy Meeting (7th-8th September)
U.S 15:00 Existing Home Sales (August)
U.S 19:15 FOMC Policy Announcement