by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound declined to a low of 1.1385 against the Euro exchange rate yesterday, while the UK currency also lost ground versus a basket of currencies following reports that UK unemployment rose at the fastest pace in 15 years during the three months through August. The jobless rate increased to 8.1%, from 7.9% in the three months though to July, while the official number of unemployed people reached 2.57 million, the most since 1994.
Claims for unemployment benefit rose for a seventh consecutive month, climbing 17,500, which was actually less than anticipated and limited the Pound’s decline. In order to hang onto the UK’s AAA credit rating, the government have pledged to press ahead with the austerity measures and continue to cut public spending. This is likely to result in a second recession in three years, amid widespread speculation that the economy contracted during the third quarter, prompting the Bank of England to resume quantitative easing.
The unemployment figures won’t inspire confidence over the UK economic outlook and in this environment, confidence towards the domestic economy will remain extremely fragile. The Pound did gain a degree of support from the improvement in risk appetite, while there was greater optimism surrounding the banking sector, which also provided support.
The Pound found support in the region of 1.56 against the U.S Dollar yesterday and rallied strongly through the course of the day, amid a mini-revival in risk appetite, which limited support for the U.S currency as a haven. The Pound peaked close to 1.58 against the Dollar, before correcting slightly weaker by the close of trading last night.
Euro / US Dollar exchange rates
The Euro advanced strongly during the European trading session on Wednesday, peaking at a one-month high above the 1.38 level against the U.S Dollar. There was a more positive attitude towards risk during the day, triggered initially by Chinese central bank moves to stabilize the Yuan and equity markets. There was also increased optimism surrounding the Euro-zone with hopes that there would be comprehensive measures to strengthen bank capital.
The EU commission called for a co-ordinated approach, but there was little in the way of details of any such plan. Following Slovakia’s rejection of the EFSF expansion on Tuesday, their opposition party indicated that it would support the deal in a fresh vote planned for Friday. There is still a strong possibility that the EFSF expansion will be agreed this week and that would have a positive effect on market confidence.
The U.S Federal Reserve minutes from the September meeting confirmed that there was a discussion surrounding the economy and appropriate policies. There were fears over the growth outlook, but members were not expecting a contraction in growth. There was a minority of members pushing for further stimulus measures to be introduced.
Today’s Exchange Rate Data
EU – ECB Monthly Bulletin Published
U.K 09:30 – Trade Balance (August)
U.S 13:30 – International Trade Balance (August)
U.S 13:30 – Initial Jobless Claims (w/e 8th October)