by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound gained against the U.S Dollar yesterday, amid speculation that the Federal Reserve would signal plans to renew quantitative easing measures in the FOMC announcement last night. Global stock market also rallied higher yesterday, which improved risk appetite and reduced the appeal of the Dollar as a safe haven. The Pound also received a boost, as a gauge of building activity unexpectedly increased.
An index of UK construction output increased to 53.9 in October, from 50.1 in September and a reading above 50 indicates growth in the sector. Following the dismal manufacturing reading earlier this week, the construction data will come as a welcome relief with many investors speculating that the UK economy will contract in the fourth quarter.
The FTSE 100 Index was up 1.1% yesterday, while the Stoxx Europe 600 Index gained 0.9%. The Greek Prime Minister George Papandreou prepared to meet the leaders of France and Germany to discuss his plan to hold a referendum on the nation’s rescue package. His actions have caused widespread uncertainty and volatility in global financial markets and he has been summoned to Cannes of the eve of the G-20 meeting.
The French President Nicolas Sarkozy is expected to insist that the only way to resolve Greece’s debt problems would be through a deal announced at last week’s crisis meetings. The Greek Finance Minister has also broken ranks and said that a referendum is not what’s needed. The Pound rallied back above 1.60 against the Dollar yesterday but weakened significantly following the FOMC announcement.
The UK currency traded back down to a low of 1.5892, as risk conditions remain an important focus in the short-term with a renewed emphasis on the banking sector. There will be the threat of renewed capital repatriation by European and global banks, as risk conditions deteriorate and this poses a significant threat to the UK banks and the Pound.
The Dollar advanced against the Pound and the Euro, despite signals from the Fed Chairman Ben Bernanke that additional monetary stimulus may be required to lower U.S unemployment. In the FOMC statement, policy makers projected subdued growth conditions, after last quarter’s pickup. Concern of a recession in the U.S will spur risk aversion and boost the Dollar.
A report from the National Institute for Economic and Social Research said that the UK economy will grow less than previously expected this year and there is a 50% chance that the economy will slip back into recession. The NIESR also cut its 2012 growth forecast by more than half and sees growth at 0.9% this year, down from 1.3%.
There will continue to be severe doubts surrounding the economic outlook, especially if there is a weaker-than-expected PMI services sector report this morning. The Pound will come under severe pressure if the report shows that services slumped into negative growth during October, which will only add to concerns over a double-dip.
Euro / US Dollar exchange rates
The Euro declined against the Dollar and is trading within a cent of the lowest level in three weeks, as European leaders said Greece will vote next month to determine whether it will stay in the Euro. The single currency came under renewed selling pressure, after the French President Nicolas Sarkozy said Greece won’t receive any additional stimulus in aid without keeping to the terms of its bailout agreement.
The Dollar and the Yen gains against most of the majors overnight, as Asian stocks slumped and boosted demand for the safest assets. There was little support from European economic data, as the PMI data registered a further contraction in the October final reading and there was a particularly weak outcome from Italy, which maintained fears over the peripheral outlook. Elsewhere, the New Zealand Dollar declined heavily, after the nation’s unemployment rate increased.
The referendum in Greece will be held on December 4th, and although there will be further debate, the vote is likely to be on Greece’s Euro future and not on the specific loan package. The government still needs to win Friday’s confidence vote with early elections if the vote is lost. The ECB announcement will obviously be watched closely today and there will be some speculation of a cut in interest rates.
Today’s Exchange Rate Data
U.K 09:28 – CIPS Services PMI (October)
U.S 12:30 – Initial Jobless Claims (w/e 29th October)
U.S 12:30 – Productivity (Q3 Prelim) – Labour Costs
EU 12:45 – ECB Interest Rate Announcement
EU 13:30 – ECB Press Conference
U.S 14:00 – Factory Orders (September)
U.S 14:00 – ISM Non-Manufacturing PMI (October) – Business Activity