by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound declined against Dollar yesterday for the first time in three trading days and the UK currency continued to trade lower versus the Euro, testing support in the region of 1.1400 by the close of trading last night. Renewed optimism that European leaders are getting closer to a resolution of the region’s debt crisis has spurred demand for the Euro, while the Bank of England’s decision to expand quantitative easing has weakened the Pound.
The Pound came under further selling pressure yesterday, after a report from the Office of National Statistics showed that UK manufacturing contracted in August, fueling speculation that the economic recovery is faltering. Given the anaemic pace of growth in the second quarter, there is an underlying threat that the UK economy is sinking towards a recession.
UK factory output fell 0.3% in August, after declining 0.2% the previous month, and the British Chambers of Commerce said yesterday that the latest round on bond purchases may not be enough to halt the decline. The BCC statement also indicated that “more radical measures” are needed to prevent a second recession in three years.
The Bank of England may introduce further monetary stimulus beyond the £75 billion injection announced last week, amid concerns the European debt crisis and slowing global growth will threat the UK recovery. BoE policy maker Adam Posen said that the central bank’s new round of stimulus is the “right place” start and officials are ready to implement more of it’s needed.
Posen was speaking about last week’s announcement and said the increase to £275 billion in total asset purchases should be enough “to make a material improvement in prospects versus what it otherwise would be and it’s the right place for us to start.” The BoE governor Mervyn King said last week that move to expand quantitative easing was in response to what may prove to be the worst financial crisis ever.
Posen has been the one member of the Bank’s monetary policy committee who has called for more QE every month since October 2010 and the minutes of last week’s decision published on the 19th October will provide an insight into the voting pattern and which members joined him this month. Policy makers Martin Weale and David Miles have publicly shown support for more stimulus measures to be introduced and a unanimous decision would probably weaken the Pound even further.
The National Institute of Economic and Social Research said yesterday that the UK’s recovery may be the “weakest of any since the end of the First World War.” Economic data this morning is expected to show that jobless claims rose 24,000 in September, a seventh consecutive increase in as many months, which indicates that rising unemployment will hamper consumer confidence and weaken the economy.
Euro / US Dollar exchange rates
The Euro consolidated on recent gains yesterday amid speculation that government officials in Slovakia, the only member of the Euro-zone that hasn’t agreed on a revamped bailout fund, will pass the vote this week. The Euro dipped to lows near 1.3575 before rallying back towards 1.37 by the close of trading last night, as political and economic developments continue to play a major role.
The outgoing European Central Bank president Jean-Claude Trichet stated that systemic risk to the Euro-zone had increased and he was very cautious over the sovereign debt crisis. He also stated that collateral could not be accepted from defaulted states, which seemed to be a clear reference to Greece, while also stating that the Euro was in no danger.
Trichet’s attempts to restore confidence to the Euro seemed to work as the single currency rose sharply higher against the majority of the major currencies. The IMFled Troika report on Greece stated that the 2011 budget targets would be missed and that there would also need to be further action to meet deficit targets from 2013 onwards. Significantly, the Troika recommended that the November loan payment should be made to Greece and that in itself restored a measure of confidence.
Today’s Exchange Rate Data
U.K 09:30 – Claimant Count (September) – ILO Unemployment
U.K 09:30 – Average Weekly Earnings (3 Mths to August)
EU 10:00 – Industrial Production (August)