The Pound found support close to 1.59 against the Dollar


Foreign Exchange Rates Currency News - The Pound found support close to 1.59 against the Dollar

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

Following on from last week, the Pound declined against the majors in the build up to the Bank of England interest rate announcement on Thursday, falling back towards 1.1650 versus the Euro, amid speculation that the monetary policy committee would extend bond purchases beyond the current £275 billion. Following the midday announcement, the BoE maintained asset purchases as policy makers look to gauge the capacity for a second round of stimulus to supplement the risk posed by Europe’s escalating sovereign debt crisis.

The nine member MPC led by the governor Mervyn King held the ceiling for quantitative easing at £275 billion. The Bank expanded asset purchases by £75 billion on October and said that current purchases will take another three months to complete and “the scale of the program will be kept under review.” This will lead to speculation of further QE over the coming months, as the UK’s exposure to Europe’s debt crisis makes a fourth quarter contraction all the more likely.

The turmoil engulfing the Euro-zone has spread to Italy, Europe’s third largest economy, further threatening Britain’s already weak economic recovery. The European Commission conceded that there is a risk of a contraction in the UK economy over the next two quarters and the Bank of England may lower growth projections in its quarterly inflation report this week.

The escalating problems in Italy have seen investors already speculating that the next round of quantitative easing will come in February and the Pound is susceptible to losses in this environment. The Bank of England also kept interest rates unchanged at 0.5%, as inflationary pressure continue to recede, and the Pound continued to decline against the Euro following the announcement.

The EC cut its UK economic outlook last week, as export demand weakens and the economy suffers from the impact of government spending cuts. It predicts UK growth of just 0.6% next year and the government maintains that the fiscal squeeze is necessary to protect the economy from the debt crisis in Europe.

The UK currency also lost ground against the U.S Dollar as Asian stocks tumbled over night on Thursday, but the Pound made strong gains versus the higher-yielding currencies like the Australian Dollar as risk appetite deteriorated. The Euro rose against the Dollar following the biggest drop in two years, as Italy raised the full amount it planned at a bill sales, which helped ease concern that the nation is struggling to fund itself and contain its debt.

The Pound found support close to 1.59 against the Dollar and there was a temporary break of this level towards the close of trading on Thursday. Investors will have to wait for the minutes of the Bank of England meeting released later this month to discover whether any policy makers recommended additional easing this month.

There was still some evidence of defensive flows into the Pound as UK bond yields remained at extremely low levels. There will still be some concerns that the banking sector could be withdrawn to help underpin European balance sheets and this could expose the Pound to heavy selling pressure if market sentiment shifts focus to the UK.

The Pound rallied strongly against the Dollar on Friday with a peak close to 1.6070 and there were wider losses for the U.S currency. Underlying confidence in the UK economy will remain weak and the focus will continue to be on the banking sector, especially with the 3-month Sterling Libor rates moving to above the 1% level.

In the UK, October’s consumer prices and retail sales are likely to be the highlights in terms of data releases this week, along with the Bank of England’s quarterly inflation report. The CPI data should confirm that the annual pace of inflation remains significantly above the government’s 2% target, while the sales data is expected to be subdued.

Euro / US Dollar exchange rates

There was an element of stability returning to European money markets on Thursday and the Euro was able to hold steady during the day, as there was a decline in Italian bond yields from a record high above 7%. The longer-term implications and policy responses continue to be debated intensely given that Italian yields still remain at high levels even with a daily decline.

There were further comments from ECB and Bundesbank officials opposing any extension to the ECB bond-purchasing program. It seems the most likely course of action will be a cut in interest rates, after policy makers cut to 1.25% earlier this month. There were, however, further concerns surrounding the Euro-zone economy as the EU commission cut the 2012 growth outlook sharply to 0.5% from 1.8%.

The Greek President announced that a new government would be sworn in on Friday under economist Papademos and there was a commitment to maintaining austerity measures, although confidence will remain fragile. The U.S data was marginally better-than-expected with weekly jobless claims falling to 390,000, while there was a narrower-than-expected trade deficit of $43.1 billion for September.

The Euro found support in the region of 1.36 against the Dollar on Friday and was generally stronger as immediate Italian fears eased. The Senate approved the government’s austerity plan, paving the way for a lower house vote on Saturday and Prime Minister Berlusconi’s formal resignation. There was a further decline in Italian bond yields, which helped ease immediate concerns.

The Euro made a move towards 1.38 against the Dollar, before consolidating in the region of 1.3750, as the dollar index dipped to its lowest level since October. There were still important underlying stresses in the Euro-zone to contend with, as reports emerged that the German government had formulated plans to manage a Greek exit from the Euro-zone.

Today’s Exchange Rate Data

EU 10:00 – Industrial Production (September)

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