The Pound declined against the U.S Dollar exchange rate

Foreign Exchange Rates Currency News - The Pound declined against the U.S Dollar exchange rate

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

The Pound declined against the U.S Dollar yesterday, falling back towards 1.55, while the UK currency resumed its upward momentum against the Dollar, as concerns surrounding the European debt crisis re-surfaced and improved demand for safe haven assets. In the UK, a report from Rightmove Plc showed that UK home sellers cut asking prices for a second consecutive month, adding to signs that the economy is losing momentum in the fourth quarter.

There is widespread speculation that the UK will slip into contraction at the end of the year and prompt a second recession, as the UK’s exposure to the turmoil in Europe, combined with government spending cuts and higher unemployment weakens consumers’ spending power. The Pound fell for the first time in two trading days against the Dollar, as house prices slumped 2.7% and Rightmove predicted a “challenging” 2012.

The Pound rallied significantly above 1.19 against the Euro at one point, after France had its credit rating outlook lowered by Fitch Ratings agency and there is a high probability that SP will slash France’s AAA rating next year. It is, however, likely that the systemic crisis engulfing the Euro-zone will impact on the UK economy, particularly considering the manufacturing sector and sluggish demand for UK exports.

The Pound and UK assets on the whole have benefited hugely from the turmoil in Europe in the past couple of months, as investors bought UK bonds as an alternative to assets denominated in Euros. Greece, Ireland and Portugal have so far needed an international bailout, while the debt levels in Italy and Spain have prompted an increase in the EFSF.

Although the Pound may continue to make gains against the Euro over the coming weeks, it seems almost inevitable that the UK currency will slip to its October low around 1.53 against the U.S Dollar. The Pound weakened last week, as reports showed unemployment continued to rise and retail sales fell by more than initial estimates in November, raising the likelihood of further quantitative easing from the Bank of England.

A report from the Nationwide Building Society last night showed that UK consumer confidence rose in November from a record low, as Britons’ expectations for the economy improved in the build up to the holiday period. An index of sentiment increased to 40 from 36 in October, which was the lowest level since the survey began in 2004.

The report was met with a largely muted response because the increase in unemployment to a 17-year high will restrain consumer spending over the coming months and therefore the short-term improvement last month is unlikely to last. Although, inflation is slowing naturally and that may improve consumers’ expectations.

Bank of England policy maker Paul Fisher voiced concerns over the economic and financial outlook yesterday and warned that conditions could be even worse than those seen in 2008. There will be further unease over the UK outlook, especially if there is renewed pressure on lending. A UK rejection of increased funding for the IMF will tend to maintain political stresses.

Euro / US Dollar exchange rates

The Euro traded close to an 11-month low against the U.S Dollar before Spain sells government bills and the release of the German report on business confidence this morning, which is expected to show a broad deterioration last month. The single currency tested near-term support in the region of 1.30 against the U.S currency, amid signs that Europe may have difficulty attracting investment from outside the Euro-zone.

There was a tele-conference of European finance ministers yesterday, as they continued to battle to restore confidence. The amount of political funding to the IMF was cut to €150 billion and there was no evidence of significant progress on policy areas. There was a weaker-than-expected Euro-zone current account figure and further net capital outflows for October.

The ECB President Mario Draghi maintained his stance on bond purchases, reiterating that they were a temporary measure to try and restore confidence. In the U.S, the NAHB housing market index rose for November and maintained a slightly more bullish outlook towards the housing sector. There was, however, further unease surrounding the U.S budget policies, as there was no progress on extending tax breaks beyond the end of the year.

Today’s Exchange Rate Data

GER 09:00 – Ifo Business Climate (December)

U.K 11:00 – CBI Distributive Trades Survey (December)

U.S 13:30 – Housing Starts (November)

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