by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound declined against the Euro in early trading yesterday, amid a sense of optimism that progress is being made on agreeing a plan to effectively tackle the European sovereign debt crisis and restore confidence in Euro-denominated assets. The UK currency was trading lower versus the majority of the 16 most actively traded currencies, as the Pound’s appeal as an alternative to the Euro waned.
Preliminary reports indicate that changes to Europe’s revamped bailout fund will be finalised this weekend and may open the door to “massive” credit lines for countries with high debt levels like Italy and Spain. The Pound found a degree of support from a government report, which showed that UK retail sales unexpectedly rose by the most in five months in September, reducing concern that the economy is hurtling towards a recession.
Sales climbed 0.6% from August, when they plunged a revised 0.4%, as the Bank of England extended monetary stimulus to help support the economy. House hold spending has been weak for some time as tension in global financial markets have a damaging effect of consumer confidence. Consumer spending is likely to be further hampered with inflation rising to 5.2%, led by higher gas and electricity costs.
The minutes from the Bank of England’s last policy meeting showed that officials were unanimous in the decision to expand the size of the quantitative easing plan to £275 billion this month. The Central Bank also indicates that growth will continued to be subdued and is expecting gross domestic product to be close to zero in the fourth quarter.
The level of joblessness has also increased in the past month with the number of unemployed rising to 2.57 million in the three months through to August, the most since 1994. The Pound remained largely unchanged against the majors over night, after a report showed that UK consumer confidence fell for a fourth in September, led by the increase in unemployment.
The Pound weakened 0.3% against the Euro yesterday and also lost ground versus the U.S Dollar, as signs emerged of a French-German split on a plan to resolve the debt crisis, which spurred demand for the U.S currency as a safe haven. The Pound is likely to trade between a range of 1.50 and 1.55 against the Dollar over the next quarter, as confidence remains fragile.
The UK and Euro-zone banking sectors will continue to be an extremely important focus in the near-term. There will be speculation that Euro-zone banks will put funds out of the UK in order to bolster capital ratios and this would risk further serious damage to the UK economy. The Pound has benefited from its position outside the Euro-zone and the focus will fall on Sunday’s EU summit announcement.
Euro / US Dollar exchange rates
The Euro rallied higher against the Dollar early yesterday, as optimism over a solution to the debt crisis pushed the single currency above 1.3820. The move was not sustained, as reports emerged that Germany and France were at odds over the details over the revision of the EFSF. There was also rumours late yesterday that Sunday’s announcement may be postponed if an agreement is not reached.
Italian bond yields continued to rise yesterday and approached the 5% level. The IMF-led Troika report on Greece was published and it was concluded that the situation was more difficult than expected, as a deeper recession put further downward pressure on tax revenues. Significantly, the Troika still recommended that the next loan tranche should go ahead as planned.
Today’s Exchange Rate Data
GER 09:00 – Ifo Business Climate (October)
U.K 09:30 – PS Net Borrowing (September)