by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound approached the highest level in a month against the Euro before the Italian parliamentary vote that tested Silvio Berlusconi’s leadership. It adds to the overall uncertainty in the Euro-zone and the Pound is benefiting from its position outside the Euro as a haven from the turmoil. The UK currency also rose for a second day versus the U.S Dollar, rising above 1.60, which represents a pivotal area of resistance and support.
The Pound also stayed higher after a report yesterday showed that UK manufacturing improved in September by more than initial forecasts. Factory output in the UK increased 0.2% from the previous month, when it fell 0.3%. The Euro remained on the defensive against the Dollar in the build up to the parliamentary vote in Italy and speculation that Greece is close to forming a national government.
The Pound continued to find solid buying support on dips and a break of near-term resistance in the 1.6075 region against the Dollar helped trigger a move to the 1.6125 area before drifting lower. The UK currency was unable to break through 1.1650 against the Euro but the level of uncertainty engulfing the Euro-zone means the Pound is still benefiting from its position outside the Euro-zone as a haven.
The economic data in the UK yesterday failed to inspire confidence in the UK economic outlook but the reports did provide some near-term relief. The report from the National Institute for Economic and Social Research estimated GDP growth of 0.5% in the three months to October, which was unchanged from the previous estimate, and provided some relief that it wasn’t revised lower.
The report suggested that the UK economy has not dipped sharply at the beginning of the fourth quarter. However, there was still an underlying lack of confidence and some speculation that the Bank of England would take further action to expand quantitative easing measures at Thursday’s monetary policy announcement.
There was still evidence of defensive flows into the Pound, which provided protection as Euro-zone uncertainty remained at extremely high levels. The Confederation of British Industry reported that the UK economic recovery will stall in the fourth quarter and 2012 growth will be about half the pace previously forecast, as the crisis in the Euro-zone clouds the outlook for exports and investment.
The economy is projected to expand 0.9% this year and roughly 1.2% in 2012, compared with a previous forecast of 1.3% and 2.2%. The economic recovery is struggling to gather momentum, as inflation at a three year high and the government fiscal spending undermine consumer confidence and saps household spending. Although the threat of a recession is looming large, the CBI urged the government to stick to its deficit reduction program.
Euro / US Dollar exchange rates
The Euro found a degree of support on falls below 1.3750 against the Dollar and drifting weaker through the course of the day, amid cautious trading conditions. The political tensions in Italy remained an extremely important focus, as yields remained at very high levels and briefly pushed towards the 7% level before a partial retreat.
The Italian Prime Minister Silvio Berlusconi failed to secure a majority of seats in parliamentary budget vote, which had developed into a key test of his authority. In response, Berlusconi stated that he would resign once planned austerity measures had been approved. Although there was some relief over a promise to resign, there was the prospect of a further period of uncertainty.
There was also a delay in forming a new Greek government, as opposition parties rejected EU demands for written assurances over approval of austerity measures. Uncertainty remained a key feature as officials also discussed the longer-term financing issues. The Dollar should gain some support if there is a flow of funds out of emerging markets.
Today’s Exchange Rate Data
U.K 09:30 – Trade Balance (September) – Non EU Trade
U.S 15:00 – Wholesale Inventories (September)
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