The Euro is heading towards a weekly decline against the Dollar and the Yen.
by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound advanced against the Euro exchange rate and remained close to a 10-week high versus the U.S Dollar, despite a report yesterday, which showed that UK construction output slowed to the weakest reading in four months for January. UK government bonds advanced, pushing 10-year yields down, as investors bought safe haven assets following the disappointing result.
The report follows a fairly robust manufacturing PMI on Wednesday and promotes mixed feelings over the sector and the outlook for the UK economy. Nevertheless, risk appetite remains strong and the Australian and New Zealand Dollars maintained two-days of gains with the former rising to a high close to the strongest level since 1985 versus the Pound.
The Aussie has also traded at a five month high versus the U.S Dollar, after a report showed that the nation’s trade surplus increased beyond initial estimates. The report added to speculation that the Reserve Bank will refrain from cutting interest rates in next week’s announcement. The Euro weakened against the Pound and the Dollar, as Greece continues to struggle to reach an agreement with its bondholders on cutting the nation’s debt level, adding to concern that Europe’s crisis will deepen.
The single currency fell against 14 out of the 16 most actively traded currencies, as the market waits impatiently for some form of resolution to the debt crisis. The Pound was unable to hold above 1.5850 against the Dollar and drifted lower through the course of the day. Declines were curbed by a generally firm tone against the Euro, as the UK currency remained stubbornly above 1.20.
The UK services PMI will be watched closely today and a weaker tone here would have potentially more damaging implications for the Pound. Bank of England policy maker Adam Posen was slightly more optimistic surrounding the economic outlook, but he still proposed additional quantitative easing of around £75 billion. The impact on the Pound of further monetary easing on this scale should be measured, although uncertainty will be a key feature ahead of next Thursday’s policy meeting.
Euro / US Dollar exchange rates
The Euro exchange rate is heading towards a weekly decline against the Dollar and the Yen, as Greece and its creditors struggle to reach an agreement on a debt swap. The Dollar has also struggled against the majors this week, ahead of the non-farm payrolls data, which will probably show that employers increased payrolls in January.
The Euro exchange rate received a temporary boost yesterday following media reports that China was considering investing in the EFSF and the ESM. The single currency retreated sharply through the course of the day, following comments from the German Chancellor Angela Merkel and the ongoing failure of EU officials to agree on a debt restructuring deal for Greece.
Following numerous reports over the past week that a deal was extremely close to being announced, the comments yesterday dampened optimism and weakened the Euro. More seriously, there were concerns that any deal would still not provide a durable solution given the underlying debt burden. In this context, there will be fears that Greece could still exit the Euro.
Today’s Exchange Rate Data
EU 08:58 – Markit Services PMI (January) – Composite
U.K 09:28 – CIPS Services PMI (January)
EU 10:00 – Retail Sales (December)
U.S 13:30 – Non-Farm Payrolls (January) – Unemployment / Average Earnings
U.S 15:00 – Factory Orders (December)
U.S 15:00 – ISM Non-Manufacturing PMI (January) – Business Activity
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