by Adam Solomon
Sterling / Euro and US Dollar
The Pound declined against the Euro exchange rate yesterday, dropping through 1.13, while the UK currency also lost ground versus a basket of currencies, after Bank of England member Paul Fisher said that further quantitative easing is still a possibility. As policy makers seem prepared to allow inflation to rise through 5% this year, the prospect of an extension in the bond-purchasing program will be discussed as a means to support the UK economic recovery.
The second quarter data does suggest that the pace of growth may have slowed in the three months to June, increasing the chances of a contraction in the economy. Elsewhere, the Pound also came under pressure after a government report showed that the UK budget deficit narrowed by less than expected in May to £17.4 billion. The Pound did, however, make gains versus the Dollar, rising up through 1.62, as global stock markets rallied and the FOMC began a two day meeting.
The Pound depreciated against all but two of the 16 most actively traded currencies, losing the most against the Swedish Krona, which is the best performing currency this year. Fisher said at a conference in London yesterday that more stimulus is “still very much on the table as one of our potential policy actions and it hasn’t been ruled out.”
The shift in focus in the Bank of England towards further quantitative easing will continue to undermine confidence in the Pound and the UK currency may slide through 1.60 versus the Dollar and 1.10 against the Euro over the coming weeks. The Central Bank publishes the minutes of its most recent policy meeting today, after holding interest rates at a record low for the 28th consecutive month.
Policy makers voted 6-3 to keep interest rates on hold but Andrew Sentance, who had maintained his recommendation for an immediate 50 basis point increase, left the committee at the end of May and his replacement Ben Broadbent is expected to adopt a more dovish stance. The chief economist Spencer Dale and Martin Weale are also pushing for a rate increase, but the governor Mervyn King and five other members have advocated the need to keep rates unchanged.
Adam Posen has been steadfast in his recommendation to implement further quantitative easing this year and it appears that some of his colleagues are softening towards an increase in bond purchases. The Pound may come under further selling pressure this morning, as the minutes may indicate that a rate increase is even further away now that Andrew Sentance has left the panel.
The Pound did rise to the highest level in a week against the US Dollar exchange rate, after UK stocks posted their biggest rally in two months, amid reports that the Greek prime minister George Papandreou won a confidence vote last night that moves the struggling nation closer towards avoiding a default. The FTSE 100 index climbed 1.4% by the close of trading last night, increasing traders’ appetite for riskier assets and weakening demand for the Dollar.
Euro / US Dollar
The Euro exchange rate encountered support in the region of 1.43 against the Dollar yesterday, before staging a strong rally through the course of the day, as risk appetite improved. Following the confidence vote last night that helped underpin Euro sentiment, there will be another vote on austerity measures next week and approval here will also be critical if Greece is to secure a fresh EU bailout package.
There will continue to be important long-term concerns surrounding the Greek debt situation as the burden will remain unmanageable and there is still a very high risk of longer-term default. There have also been signs of increased stresses within the interbank market and demand on the ECB for short-term funding has increased, which will tend to undermine the Euro.
The data released in the Euro-zone yesterday showed that investor confidence in Germany dropped to the lowest level in almost three years in June, as the sovereign debt crisis sparked concerns over the economic outlook. The ZEW index fell to -9 from 3.1 in May, which is the lowest reading since January 2009, but the Euro was largely unaffected by the report.
U.K 09:30 – BoE Monetary Policy Committee Minutes of 8/9 June Meeting
EU 10:00 – Industrial Orders (April)
EU 15:00 – Flash Consumer Confidence (June)
U.S 17:30 – FOMC Rate Announcement
U.S 19:15 – Bernanke Press Conference