The Euro recorded a weekly decline against the Dollar and the Yen, as Greece and its creditors struggled to reach an agreement on a debt swap deal.
Sterling / Euro and US Dollar exchange rates
Following on from last week, The Pound received a timely boost as a gauge of UK manufacturing unexpectedly showed that growth returned to the sector in January and rose to the highest level in eight months. The UK currency rose through 1.58 to a 5-month high against the Dollar and consolidated on Wednesday’s gains versus the Euro, as factory output increased following a quarter of contraction.
The gauge rose to 52.1 from a revised 49.7 in December with a level about 50 indicating growth in the sector. Separate reports showed that manufacturing in Europe, China and India also rose in January, which increased investors’ demand for riskier assets and weakened the Dollar’s position as a safe haven.
The UK manufacturing figures were a real surprise considering that Europe, the biggest UK export market, has been engulfed in sovereign debt crisis, which was thought to have clouded the outlook for factory production this year. It is difficult to say whether this trend is sustainable but the boost in output will be a welcome relief to Bank of England officials, who will be considering whether to implement further quantitative easing measures next month.
The Pound maintained a firm tone against the Dollar and pushed to highs above 1.20 versus the Euro. The UK currency is still being influenced strongly by swings in risk sentiment and a firm global tone helped boost the UK stock market as well as Sterling. The FTSE 100 Index rose by the most in a month, as manufacturing gauges in China and the U.S rose and increased optimism that growth in the world’s largest economies will boost earnings potential and spur demand.
The Pound advanced against the Euro and remained close to a 10-week high versus the U.S Dollar, despite a report, 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 Aussie Dollar 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.
On Friday, the UK services PMI data was much stronger-than-expected with a rise in the January reading to 56, from 54 the previous month, the strongest result since March 2011. There was a shift in expectations surrounding the Bank of England interest rate announcement this week following the data with regards quantitative easing, which will help support the Pound.
Euro / US Dollar exchange rates
The Euro recorded a weekly decline against the Dollar and the Yen, as Greece and its creditors struggled to reach an agreement on a debt swap deal. The Dollar also struggled against the majors last week, as the non-farm payrolls data was much stronger-than-expected with a 243,000 increase in the number of jobs for January, from a revised 203,000 increase the previous month.
The Euro received a temporary boost following media reports that China was considering investing in the EFSF and the ESM. The single currency retreated sharply through the course of the week, 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 from Merkel 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 09:30 – Sentix Index (February)
GER 11:00 – Industrial Orders (December)
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