by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound continued to decline against the high-yielding currencies yesterday, falling back towards 1.52 against the Australian Dollar and slipping under 13.00 versus the South African Rand. Sterling moves continue to be dominated by international developments, after news broke yesterday of a coordinated action between major central banks around the world to improve liquidity.
The Pound pushed to a high above 1.5750 against the U.S Dollar as risk appetite improved and stock markets rallied. The UK currency will remain very sensitive to developments within the banking sector and any improvement in financing conditions should provide net support. There will still be a high degree of uncertainty over the economic outlook, especially given the government’s warning over the risk of another credit crunch.
The budget and growth outlook will be watched closely over the coming weeks and there is still a risk of the UK moving to an unsustainable medium-term position in the event of another recession, which would result in multiple credit rating downgrades. UK gilts fell for a second day, amid reports of successful bond auction in Spain and France, which reduced the appeal of the Pound as a haven.
The Pound is likely to benefit from an environment of risk appetite, even as a report yesterday showed that UK manufacturing contracted in November at the fastest pace since June 2009. The Bank of England governor Mervyn King has urged banks to enhance efforts to bolster their defense against the debt crisis in the Euro-zone, describing it as “systemic.”
The Pound found support on dips towards 1.5650 against the Dollar towards the close of trading last night, but was unable to break higher. The manufacturing data also showed a further decline in orders and the rate of decline in employment was also the highest for over two years, which maintained fears surrounding the economic outlook.
Manufacturers in the UK are feeling the pinch from the sovereign debt crisis in Europe and is jeopardizes the outlook for exports to Europe, as demand weakens and global growth stagnates. China’s manufacturing also contracted last month for the first time since February 2009, as the property market cooled and export demand dropped.
The Bank of England has been counting on the weaker Pound to bolster UK exports and help drive the economic recovery, as the government continues to embark on its biggest fiscal cuts in a generation. The BoE, Federal Reserve and four other central banks pledged this week to lower the cost of emergency Dollar funding by 50 basis points to improve liquidity.
There will still be unease surrounding the UK banking sector and the impact on lending and that will continue to affect the Pound. It would also be dangerous to believe that Sterling will continue to derive defensive demand from the crisis in the Euro-zone and volatility is liable to increase. Swings in risk sentiment will continue to drive the market in the near-term and the Pound may decline once again against the Dollar if stocks begin to deteriorate.
Euro / US Dollar exchange rates
The Euro traded in narrow ranges against the Dollar during the day with a phase of consolidation following sharp gains triggered by the central bank moves on Wednesday. There were many political comments ahead of next week’s EU summit, as the French President Sarkozy warned over the efforts required to prevent a break-up of the Euro-zone.
The U.S PMI manufacturing data was stronger-than-expected with an increase of 52.7 for November, from 50.8 previously and there was a significant recovery in both the orders and prices components of the report, which continued to suggest that the economy is making some headway. This speculation will be confirmed if there is a stronger-than-expected non-farms payrolls report this afternoon.
Today’s Exchange Rate Data
EU 10:00 – Producer Price Index (October)
U.S 13:30 – Non-Farm Payrolls (November) – Unemployment / Average Earnings
- FX145 Foreign Exchange Daily Insight – The Pound rallies against the high-yielding currencies, as stocks decline
- The Pound rallied against the high-yielding currencies yesterday, as risk appetite deteriorated
- The Pound continued to decline against the Euro and also came under renewed selling pressure versus the U.S Dollar yesterday
- Foreign Currency Exchange Rate Forecast – The Pound continued to decline against the U.S Dollar
- Sterling weakens against 15 out of the 16 most actively traded currencies