by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound rallied strongly against the Euro yesterday, rising up through 1.15 and erasing last week’s corrective recovery for the single currency, as EU officials failed to offer a plan to halt the sovereign debt crisis and Greece struggled to avoid a default. As a result, demand for safe haven currencies rose and the U.S Dollar made strong gains versus the Euro and the Pound.
European Union and IMF officials are assessing whether Greece can meet the conditions for a planned bailout and the Euro is likely to weaken on speculation that a default is just a matter of time. The Pound strengthened against most major currencies, rising through 12.00 versus the South African Rand, after a report earlier in the day showed that UK house prices unexpectedly increased this month.
The increase in risk aversion in the market came as UK shares fell for the first time in five days, with the FTSE 100 Index dropping 2% on the day. EU and IMF will liaise with the Greek Finance Minister Evangelos Venizelos to judge whether his government is eligible for its next aid payment next month and are on track for a second rescue package that was approved by EU leaders in July.
After a two day meeting last week, Sweden’s Anders Borg said Greece hadn’t done enough to meet is deficit reduction targets. The Euro will remain under pressure in the meantime and the current rate represents a good opportunity for Euro buyers, particularly considering the UK economy may have slipped into negative growth in the third quarter and the Bank of England prepares further quantitative easing.
The BoE said that its £200 billion bond purchase plan that started in March 2009 had “economically significant” effects and may have raised GDP by 1.5% to 2%. The Bank’s quarterly bulletin also indicated that the QE plan may have increased inflation by between 0.75 to 1.5 percentage points. The Pound rose for a second day against the Euro, rising 0.4% by the close of trading last night.
The Pound encountered resistance close to 1.5750 against the Dollar before trading sharply lower through the course of the day with lows below 1.5640. There is a continuing lack of confidence in the UK economy with fears surrounding growth exacerbated by concerns in the Euro-zone surrounding debt levels and the threat of contagion to other high-deficit regions.
The Business Secretary Vince Cable reiterated the need for the Bank of England to respond with further quantitative easing and speculation will increase as we approach the October interest rate announcement. Therefore, the BoE minutes on Wednesday will take on added significance for any signs that policy makers are preparing to take action in the next month.
The Pound has sunk below its 200-day moving average against the Dollar and may be set for a further move towards 1.5489, its lowest level in over eight months. The 1.5489 level is significant because it is the 50% Fibonacci retracement level of the Pound’s upward surge from a low of $1.4231 on May 20th 2010 to a high of 1.6747 on April 28th this year. Fibonacci analysis is based on a theory that prices rise or fall depending on certain percentages after reaching a high or low.
Euro / US Dollar exchange rates
The Euro extended its decline against the U.S Dollar for a third straight day, after Standard Poor’s cut Italy’s credit rating further, adding to concern that the sovereign debt crisis will increase borrowing costs in the region. The single currency also dropped to its lowest level since 2001 against the Yen, before discussions with Greece resume today.
The Euro slumped towards 1.3620 against the Dollar and Italy follows Spain, Ireland, Portugal, Cyprus and of course Greece as having their credit ratings cut thus year. The ECB began buying Italian and Spanish government bonds in August, as the debt crisis pushed credit default swaps to the highest levels on record. The Dollar also gained from a further decline in risk sentiment, as U.S stocks declined 0.6% on the day.
The Euro also came under selling pressure on fears that the Euro-zone is on the verge of a major banking crisis and there were reports that some Chinese banks were cutting ties with European banks. In the U.S, the NAHB housing sector index remained weak, although the impact in the market was limited. The Dollar continued to gain defensive support, especially with emerging markets being sold.
Today’s Exchange Rate Data
U.S IMF Releases World Economic Outlook
GER 10:00 ZEW Expectations Survey (September)
U.S 13:30 Housing Starts (August)