Sterling to US Dollar and Euro exchange rates – The Pound declined to the lowest level against the U.S Dollar

Currency

Sterling to US Dollar and Euro exchange rates - The Pound declined to the lowest level against the U.S Dollar

by Adam Solomon

Sterling / Euro and US Dollar

The Pound declined to the lowest level against the U.S Dollar in two months, while the UK currency also came under renewed selling pressure versus the majority of the 16 most actively traded currencies. A report from the Office of National Statistics showed that UK retail sales dropped more-than-expected in May, led by higher fuel costs and ongoing concerns about the labour market.

Consumer spending rose in April, which coincided with extra bank holidays and the Royal wedding. However, sales fell 1.4% in May, wiping out the 1.1% gain the previous month. The Pound declined and bonds rose after the report, as UK consumers are being squeezed from rising inflation outpacing wage growth, while consumer sentiment is being undermined by government spending cuts.

The Bank of England governor Mervyn King said earlier this week that the economy is undergoing rebalancing that will take several years, as he justified the Bank’s decision to keep interest rates on hold to aid the recovery. The Central Bank’s credibility has been called into question this year with UK inflation accelerating at the fastest pace in two years and likely to breach 5% over the coming months.

The Pound traded as low as 1.6106 against the Dollar yesterday, as the UK currency struggled and demand for lower-yielding currencies increased. The Yen and Swiss Franc also made widespread gains with the latter rising to a fresh record high against the Euro, as escalating concern over sovereign debt in the Euro-zone prompted traders to seek the security of so-called safe haven assets.

The monthly drop in UK retail sales was the biggest since January 2010 and excluding fuel, sales fell 1.6% on the month and were unchanged on the year. Reports earlier this week also showed that unemployment claims surged to the highest level in almost two years in May and wage growth was an annual 1.8% in the three months through April.

In his Mansion House speech on Wednesday, Mervyn King said that if the bank raised interest rates to combat inflation, it would have led to a weaker economy and added that a rate increase wouldn’t have shielded consumers rising oil prices. King said that an increase at this stage “would have meant a weaker recovery or even further falls in output and a risk of inflation falling well below the target in the medium term.”

The Pound has weakened significantly against the majors, as investors continued to scale back expectations that the Bank of England won’t raise interest rates before May 2012. As recently as February, investors were anticipating an increase in UK borrowing costs in May this year. The UK currency will encounter strong support in the region of 1.60 against the Dollar, but an improvement in risk appetite could see the market bounce higher once-more.

Euro / US Dollar

The Euro traded at a fresh two month low against the Dollar on concern that the sovereign debt crisis is worsening. The political deadlock surrounding a fresh rescue package for Greece has caused a lot of uncertainty in the Euro-zone and a diversification away from the Euro. There were also reports yesterday that Germany has blocked a rescue package for July and threatened to push it back to September.

The possible delay has weakened the Euro further and a move under 1.40 against the Dollar appears likely. The U.S currency gained along with the Yen and Swiss Franc and is benefiting from the decline in risk appetite amid concern that Greece will default on its debt if a resolution is not found. Euro buyers are well placed to take advantage of the current, particularly considering the ECB still plans to raise interest rates in the Euro-zone in July. Dollar sellers can also take advantage of the best rate in more than two months or least consider a stop order to protect against a sudden reversal.

The ECB President Jean-Claude Trichet stated that markets must avoid compulsion and triggering a credit crisis in any restructuring of Greece’s debt. There were also fresh concerns over further damage to the European banking sector and sentiment is likely to remain weak, putting further pressure on the Euro in the short-term.

The indications late yesterday were that the International Monetary Fund would pay the next loan tranche by early July but this would be dependent on fresh austerity measures. Public protests continued in Greece and there were further resignations within the government. In the U.S, there was a stronger-than-expected reading for U.S housing starts and building permits also rose to the highest level in five months.

The unusually positive data on the housing sector will provide a degree of relief but there was a decline in the weekly jobless claims data to 414,000. There was also a sharp decline in the Philadelphia Fed index to the lowest level in two years, which will maintain fears over the economic outlook. The Dollar is benefiting from its safe haven status, but there is caution ahead of the FOMC meeting next week.

Today’s Data

EU 10:00 – Trade Balance (April)

U.S 14:55 – Michigan Sentiment (June Prelim)

U.S 15:00 – Leading Indicators (May)

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