by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound weakened against 15 out of the 16 most actively traded currencies yesterday, after a report from the Office of National Statistics showed that the revised estimate of UK gross domestic product slowed by more than initial estimates in the second quarter, adding to pressure on the Bank of England to introduce further quantitative easing measures.
The anaemic pace of growth in the three months to June makes it increasingly likely that the UK economy slipped into negative growth during the third quarter and that will prompt renewed concerns over a second recession in three years. The Bank of England announcement today will take on added significance, amid further suggestions that policy makers will extend quantitative easing in the form of bond purchases with newly created money.
The Pound is likely to decline on such an announcement and continue weakening through to the end of the year. Elsewhere, the Pound was given a reprieve by the UK services sector data, which showed a much needed improvement in September. Services activity rose to 52.9 from 51.1 in August and a reading above 50 indicates growth in the sector.
The Pound rallied against the Euro, recovering earlier losses, after Moody’s Investors Service cut Italy’s credit rating by three levels, highlighting the need for the ECB to implement further stimulus measures.
The escalating tension surrounding the European sovereign debt crisis and general lack of appetite for high-yielding assets has seen the Australian Dollar weaken significantly against the Pound and the Dollar over the past couple of weeks.
Although the Aussie will be dominated by risk sentiment, there is a general unease surrounding the pace of economic activity in the country and a growing sense that the Reserve Bank will cut interest rates over the coming months. House prices continued to fall in August, dropping 0.4% on the month, taking the annual decline to 3.7%.
The Australian and New Zealand Dollars bounced back overnight, reversing the earlier decline, as Asian stocks extended a worldwide rally, which increased demand for higher-yielding currencies. The German Chancellor Angela Merkel said yesterday that she is ready to discuss possible recapitalization of European banks at a summit this month.
The International Monetary Fund also renewed its calls for the ECB to step up its response to the region’s sovereign debt crisis if it continues to destabilize financial markets. The Aussie, Kiwi and Rand will be susceptible to aggressive swings in risk sentiment and the upward move in global stock markets will continue to boost demand.
The Pound was unable to make any headway above 1.55 against the Dollar, but the UK currency found support above 1.54, amid an improvement in risk conditions. The improvement in UK services growth was offset by a decline in business confidence to the lowest level in 30-months. The focus today will inevitably switch to the Bank of England announcement at midday and the threat of further quantitative easing will impact the Pound. The UK currency is likely to strengthen if policy makers decide against action this month.
Euro / US Dollar exchange rates
The Euro initially declined against the majority of the 16 most actively traded currencies yesterday, amid suggestions that the debt crisis may spread to other high deficit nations, as Italy’s credit rating was cut by three levels. Investors are shunning Euro-denominated assets in the build up to the ECB rate announcement and accompanying press conference this afternoon.
The single currency also weakened to a near decade low versus the Yen, amid speculation that the central bank may introduce fresh stimulus measures today in an attempt to bolster the economic outlook. The Euro briefly stabilized against the Dollar, after a report showed that U.S services industries expanded in September by more than initial forecasts, reducing demand for the Dollar as a safe haven.
There were some suggestions that the ECB could move to cut interest rates in Europe and the level of volatility is expected to increase following the rate decision and press conference. In the U.S, the ADP employment report, which will provide an insight into the Non-farm payrolls report on Friday, showed that private-sector job gains rose 91,000 in October.
Today’s Exchange Rate Data
GER 11:00 – Industrial Orders (August)
U.K 12:00 – BoE Rate Announcement
EU 12:45 – ECB Rate Announcement
EU 13:30 – ECB Press Conference
U.S 13:30 – Initial Jobless Claims (w/e 1st October)