by Adam Solomon
Sterling / Euro and US Dollar
The Pound fell below $1.60 against the U.S Dollar for first time since April 1st yesterday, while the UK currency also lost ground versus the majority of the 16 most actively traded currencies. An index of UK retail sales dropped to the weakest level in a year, further reducing the prospect of an interest rate increase this year. The Pound slumped as the outlook for the UK economy remains pessimistic and the chances of a second quarter contraction increases.
The Pound has, however, bounced back against the Euro exchange rate, as the single currency also declined heavily in the build up to an EU summit in Brussels yesterday. Finance ministers discussed Greece’s financing needs as the struggling nation drifts closer towards default. Underlying confidence in the UK and the Pound has weakened following comments on the possibility of further quantitative easing in the June MPC minutes.
Although the Bank of England is probably months away from embarking on further bond-purchasing, references to the possibility have clearly undermined sentiment in the UK. Even if quantitative easing is resisted, interest rates are likely to remain at ultra-low levels to support growth, which will also undermine potential yield support.
The yield on the 10-year gilt market slid to the lowest level in eight months yesterday, as investors preferred the safest fixed income assets. The Pound is likely to remain under pressure, as the focus switches back to UK fundamentals, while the market supports any central bank looking to raise interest rates, with the ECB expected to move in July, underpinning support for the Euro.
From a technical perspective, the Pound declined below its 200-day moving average for the first time since January, weakening 0.7% versus the U.S Dollar. The retail sales data yesterday showed that consumers are being squeezed as inflation outstrips wage growth and the government implements the deepest spending cuts in a generation.
The minutes from the June policy meeting said that “fiscal challenges in the Euro-area periphery highlighted the potential for further adverse shocks to demand. For some of these members, it was possible that further asset purchases might become warranted if the downside risks to medium term inflation materialised.”
The Pound also slumped to the lowest level on record against the Swiss Franc yesterday, trading at a low of 1.3358 in London. Money markets have scaled back UK interest-rate expectations once more with overnight interbank average suggesting borrowing costs will be left on hold until August 2012. The Pound traded back below 1.60 against the Dollar again this morning, even as stocks rose worldwide on reports that the EU has pledged support to Greece. – as they say, what should go up and doesn’t go up can only go down.
Euro / US Dollar
The Euro exchange rate declined further against the U.S Dollar on Thursday and selling pressure accelerated in the U.S session with the single currency falling to lows below 1.4150. The uncertainty surrounding the European outlook and escalating concerns over sovereign debt in other peripheral economies has undermine confidence in the Euro. Sharp falls in commodity prices followed an announcement by the IEA that it would release strategic oil stocks into the market.
The EU and the IMF announced that they had reached an agreement with the Greek government over a five year austerity package. Approval of the plan would secure a new €120 billion bailout for Greece, which would prevent an immediate debt default. The Euro recovered after the announcement but there will still be a high degree of uncertainty.
The Greek government will need to secure parliamentary support for the measures on Tuesday next week and an agreement is far from guaranteed, especially with the opposition party failing to back planned tax increases. In the U.S, the Dollar is being supported on the decline in risk sentiment with the economic data taking a back-seat. U.S jobless claims rose to 429,000 in the latest weekly report and there was a breakdown in congressional talks over raising the U.S debt ceiling, amid a lack of confidence in U.S data.
GER 09:00 Ifo Business Climate (June)
U.S 13:30 Durable Goods (May)
U.S 13:30 Final GDP (Q1)