by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound fell by the most in almost a month against the U.S Dollar yesterday, trading back under 1.60 and falling from a near seven week high, after a gauge of business confidence slumped and UK house prices dropped. The Dollar also gained on risk aversion, while the Yen weakened, as Japan intervened to weaken its currency, adding to the overall pessimism in the market.
UK stocks subsequently declined for a second day, as the euphoria surrounding the EU announcement last week subsided and investors await details on how European leaders will fund the region’s €1 trillion bailout fund. The FTSE 100 Index was down 1%, reducing the gauge’s biggest monthly advance since 1992.
The Pound made gains against the Euro, rising back through 1.14 in early trading to a high of 1.16, amid concern that last week’s rescue package may struggle to contain the sovereign debt crisis. Italian bond yields have surged to a record level, while ratings agency Fitch said the 50% of Greek writedowns amounts to a technical default.
The Pound has rallied strongly against the Euro but a report this morning is expected to show that the UK economy grew 0.4% in the third quarter, up from 0.1% in the revised figures for Q2. This level of growth may be a bit optimistic considering the tone of recent economic data and a lower output would certainly put Sterling on the back foot.
The Pound surged as much as 5% against the Yen yesterday, as Japan intervened to weaken its currency, adding to overall uncertainty in the market. The UK suffered its biggest decline against the Dollar in almost a month, before recovering towards the close of trading last night. However, the UK currency slipped back under 1.60 in the build up to this morning’s GDP data.
An index of business expectations for the economic outlook fell 22 points in October from the previous month to minus 15 and that represents the weakest reading since March 2009. A separate report yesterday from Hometrack showed that the average cost of a home in the UK fell 0.2% from September and was down 2.8% from a year earlier.
A report from the Bank of England showed that lenders granted 50,967 loans to buy homes, down from 52,347 in August. The Pound has weakened 2% in the past month against a basket of currencies, extending its decline over the year to 4.4% on a trade weighted basis. Nonetheless, the Pound has taken full advantage of renewed Euro weakness, rising over 2% on Monday, amid concern that EU leaders will struggle to fund the enormous bailout fund.
The Euro is under renewed selling pressure as officials struggle to contain the sovereign debt crisis and that is spurring demand for the Pound as a haven from the turmoil in Europe. The latest GDP figures for the third quarter and the manufacturing PMI will be watched closely this morning and is likely to lead to another surge in volatility.
A rebound in GDP growth would certainly provide a degree of confidence for the Pound, but there will still be fears over the fourth quarter outlook, especially if there is a slide in the PMI index. The Pound weakened against the Dollar as risk appetite deteriorated and a close under 1.60 would certainly indicate that the trend is turning.
Euro / US Dollar exchange rates
The Euro declined heavily against the Dollar, Yen and the Pound yesterday, amid mounting speculation that the slowdown in European growth and the worsening outlook will lead to a cut in European interest rates. The Dollar strengthened towards 1.39 last night, after China’s PMI index dropped and Asian stocks tumbled, boosting demand for the U.S currency as a safe haven.
The Euro lost 2% against the Dollar yesterday in the biggest intraday slide since August 2010. There were further concerns as bond yields in Italy continued to surge higher, rising close to 6.1% despite further buying from the ECB. There were also further doubts whether austerity measures would be introduced in Italy, especially as it remains in a vulnerable position.
In this context, there will be additional pressure on the ECB to cut interest rates on Thursday and take a more aggressive stance in buying Italian bonds. There was a massive setback for the Euro yesterday, as the Greek Prime Minister Papandreou called for a referendum to decide whether the EU relief package should be accepted.
Today’s Exchange Rate Data
U.K 07:00 Nationwide House Price (October)
U.K 09:30 CIPS Manufacturing PMI (October)
U.K 09:30 Prelim GDP (Q3)
U.S 14:00 Construction Spending (September)
U.S 14:00 ISM Manufacturing (October)