by Adam Solomon
Sterling / Euro and US Dollar
The Pound declined against the U.S Dollar yesterday, falling back towards the first area of support in the region of 1.6110, while the UK currency lost further ground versus the Yen and Swiss Franc. The deterioration in risk appetite sparked fresh demand for the safest assets as a hedge against risk. Falling stock markets underlined the lack of confidence sweeping through financial markets, amid escalating concern over the threat of contagion from Greece to other high deficit nations in the Euro-zone.
The Pound briefly found some support against the Euro, as decisions on the next aid payout to Greece were put off until next month, as officials wrangle over the terms of any bailout. The Euro also fell against the Dollar for the first time in three days and recorded the longest stretch of losses versus the Yen in six weeks. Euro-zone finance ministers also pushed for Greece to pass laws to cut its budget deficit and sell off state owned assets.
Escalating concerns over the outlook for the UK economy means that the Pound is likely to remain vulnerable over the coming weeks, especially with the Bank of England reluctant to raise interest rates until the economy shows some signs of gaining momentum. The Central Bank will publish the minutes from this month’s policy meeting on Wednesday, after keeping rates at 0.5% for the 28th month in a row.
The Pound may come under immediate selling pressure if the dovish tone of the minutes suggests that the BoE will keep interest rates at ultra-low levels for some time. Some market strategists even believe that the MPC will refrain from tightening monetary policy until 2013, citing appalling economic data and lower wage growth. Indeed, the Pound is likely to slip below 1.60 against the Dollar if interest rates are kept unchanged into next year.
The Pound relinquished earlier gains against the Euro yesterday, even as speculation over a Greek bailout and the longevity of the Euro as a credible currency reached fever pitch. Global stock markets continued to decline yesterday, as the FTSE 100 Index dropped 0.5% and the Stoxx Europe 600 slumped 0.7%, increasing traders’ appetite for the safest assets.
There was some evidence yesterday that the UK is gaining defensive support given its position outside the Euro-zone, particularly considering the government is resisting pressure to fund part of a Greek bailout package. Nevertheless, there are still plenty of underlying risks within the UK banking sector and overall confidence is likely to remain subdued. In this context, the Pound is still being supported by fundamental weakness elsewhere, rather than any real support for the UK currency.
The Pound has declined to the weakest level against the Euro in a week this morning, before data in the UK that is expected to show the UK budget deficit widened in May. Despite the government’s dramatic cuts in public spending, net borrowing rose £16.5 billion last month, from £7.7 billion in April. The Pound lost 0.2% against the Euro, but the improvement in Asian stock market sentiment overnight boosted the UK currency versus the U.S Dollar.
Euro / US Dollar
The Euro tested support below 1.42 against the U.S Dollar yesterday with further unease over the Greek situation undermining support for the single currency. There was some improvement in confidence during the day as officials looking to reassure markets but the likely delay in the next Greek loan tranche will continue to support safe haven currencies on defensive demand.
The EU will only approve further support for Greece on the condition that there is a parliamentary approval for the latest austerity measures. The Greek government faces a no confidence vote late on Tuesday and victory should guarantee passage of fiscal measures to reduce the nation’s budget deficit. From a longer-term perspective there were also warnings over the outlook for the Euro and there will be a fundamental lack of confidence in the single currency.
The Dollar lost some ground against the Euro overnight with the improvement in Asian stocks reducing demand for the safest assets. The U.S currency is also declining in the build up to the housing data released today, with existing home sales expected to drop in May to the lowest level this year. The FOMC begins a two day meeting today and are expected to keep interest rates at the lowest level on record.
U.K 09:30 PS Net Borrowing (May)
GER 10:00 ZEW Index (June)
U.K 11:00 CBI Industrial Orders (June)
U.S 15:00 Existing Home Sales (May)