by Adam Solomon
Sterling / Euro and US Dollar exchange rates
Following on from last week, the Pound fell against the Euro by the most in two weeks, as European officials agreed to expand a rescue fund for indebted nations, which reduced demand for the UK currency as a perceived safe haven from the sovereign debt crisis. The Pound weakened against all but two of the 16 most actively traded currencies, before a report on Thursday showed that an index of retail sales fell this month.
EU leaders have persuaded bondholders to take 50% losses on Greek debt and boosted the rescue fund to an incredible €1 trillion. Officials have responded to global pressure to step up measures to fight the debt crisis, amid concerns that Greece will default and the threat of contagion to other high deficit nations like Italy and Spain.
Even though the key details of the rescue package are murky at best, the announcement has restored near-term confidence in the market and the Euro has rallied across the board as a result. Last ditch talks with bank representatives led to the debt-relief accord, in an effort to quarantine Greece and prevent speculation against Italy and France from weakening the Euro-zone economy and impacting on global growth.
The German Chancellor Angela Merkel told reporters that “the world’s attention was on these talks. We Europeans showed that we reached the right conclusions.” Measures include recapitalization of European banks, a potentially bigger role for the International Monetary Fund, a commitment from Italy to do more to reduce its debt and a signal from leaders that the ECB will continue bond purchases in the secondary market.
The Euro advanced 0.7% against the Pound and the Dollar following the announcement, while stocks gained worldwide, reducing the allure of the Dollar and the Yen as a haven and strengthening the high-yielding currencies like the Australian Dollar and South African Rand. The Stoxx Europe 600 Index rose 2.5% and Stardard Poor’s 500 Index futures increased 1.6%.
The increase in risk appetite saw the Pound rally towards a seven week high against the Dollar at 1.60. The UK currency came under pressure this morning, as a report from the Confederation of British Industry showed that retail sales dropped to minus 16 in October, indicating that the pace of consumer spending is slowing, which will impact on the economic recovery.
The Pound found support on dips to the 1.6080 area against the Dollar on Friday and maintained a generally firmer tone with gains to a fresh 7 week high near 1.6150. The latest UK economic data will be watched closely this week with a particular focus on the PMI data following stronger than expected data last month.
If there is another stronger than expected batch of data, there will be speculation that the UK economy is proving to be more resilient than expected, in contrast to generally pessimistic comments from the Bank of England. The banking sector will continue to be an important focus, as Sterling will be vulnerable to renewed selling pressure if the Euro summit fails to provide durable relief to the financial sector.
The Bank of Japan intervention has dominated early trading this morning, as a wide U.S recovery pushed Sterling back towards the 1.60 level versus the Dollar. The focus this week will be Tuesday’s release of the first estimate of UK gross domestic product in the third quarter. Growth for the three month period is expected to be 0.4%, up from Q2’s very weak 0.1%, but a weaker figure would push Sterling lower.
Euro / US Dollar exchange rates
The Euro was unable to break above the 1.42 level against the Dollar on Friday and drifted weaker through the course of the day, as the euphoria surrounding the European announcement calmed down and market reflected on the outcome. There were reservations surrounding the agreement, as markets focused on key elements within the package.
Ratings agency Fitch stated that plans to increase voluntary Greek writedowns to 50% would be a default, which undermined confidence. There will also be increased fears that private-sector banks will reject participation in the deal. The latest Italian bond auction was weaker-than-expected as benchmark 10 year yields increase to above the 6% level.
The poor result of the auction will increase doubts over Italy and this was a negative element for the Euro given Italy’s position in the Euro-zone. The U.S economic data did not have a major impact on the market with consumer spending increasing 0.6%, which was largely in line with initial estimates.
Today’s Exchange Rate Data
EU 09:00 M3 / 3 Month Moving Average (September)
EU 10:00 Business Climate (October)
EU 10:00 Economic Sentiment (October)
– Industrial / Services / Consumer
U.K 11:00 Distributive Trades Survey (October)
U.S 13:30 Advance GDP (Q3)
U.S 13:30 Initial Jobless Claims (w/e 22nd October)
U.S 15:00 Pending Home Sales (September)