The Pound continued to take advantage of broad Dollar weakness during the day and pushed to the highest level in two weeks at 1.56 before drifting weaker.
by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound declined against the Euro exchange rate yesterday, losing all of Friday’s gains up to 1.2080, to record a low of 1.1952 by lunchtime, after an industry report showed that company profit alerts rocketed in the fourth quarter, adding to signs that the economy is heading towards a recession. We said last week that the Pound seems to be losing momentum against the Euro and it has now declined for five days out of six, indicating that the trend is turning negative and, barring the odd blip, we could see a move back down towards 1.1732.
The Pound lost ground against all but two of the 16 most actively traded currencies and there is speculation this week that the fourth quarter growth figures will show a contraction in growth during the fourth quarter. A separate report from the Bank of England will also give us an insight into the prospect of further quantitative easing next month, with the current round of bond purchases set to finish in February.
Both reports are expected to be negative for the Pound but the UK currency is still deriving support from its position outside the Euro-zone and the Pound will remain in demand, especially if a Greek default is on the cards. The Euro found support yesterday, after the French Finance Minister Francois Baroin said negotiations on Greek debt are making “tangible progress.”
The Pound continued to take advantage of broad Dollar exchange rate weakness during the day and pushed to the highest level in two weeks at 1.56 before drifting weaker. Bank of England policy maker Adam Posen stated that the downside risks to the economy had declined over the past few weeks and this will tend to dampen expectations of aggressive action from the Central Bank, especially considering Posen has been the most dovish member of the MPC.
However, Posen said that policy makers will increase quantitative easing measures if new growth and inflation forecasts justify an expansion of the program. The MPC left the target for bond purchases at £275 billion this month and some officials have said that more may be required. Reports on preliminary GDP in the fourth quarter will be watched closely this week for signs that the economy contracted in the final three months of the year.
This should in effect support demand for the Pound but the flow of defensive demand for Sterling will be watched closely with any sustained improvement in Euro confidence likely to curb Sterling buying support. In terms of economic data, the focus today will be on the latest government borrowing data, given the focus on budget spending trends.
Euro / US Dollar exchange rates
There was further evidence of renewed demand for the Euro exchange rate yesterday, which helped push the single currency to the highest level this year versus the U.S Dollar with a break above 1.30. It’s no coincidence that EUR/USD breaking higher also means the single currency is making gains versus the Pound and there were further gains for European stocks as liquidity levels improved.
Rising stocks had a positive impact on risk appetite, which reduced defensive demand for the Dollar and the Yen as safe haven currencies, as well as helping to improve confidence surrounding the Euro. There were suggestions from German government officials that they might consider running the EFSF in tandem with the ESM in an emergency situation.
There was further talk on Greek debt restructuring during the course of the day with initial optimism that a deal could be agreed. In the event, the Eurogroup meeting rejected the deal put forward by creditor negotiators and there will be fresh negotiations aimed at reaching an agreement by mid-February. Given that Germany also rejected any increase in the Greek bailout amount, there was fresh speculation over a hard default.
Today’s Exchange Rate Data
EU 08:58 – Manufacturing PMI (January) – Services – Composite
U.K 09:30 – PS Net Borrowing (December)
EU 10:00 – Industrial Orders (November)
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