The Euro found solid buying support on dips in the region of 1.3360 and there was further strong buying through the course of the day on Friday.
Sterling / Euro and US Dollar exchange rates
Following on from last week, the Pound encountered strong resistance in the region of 1.5725 against the U.S Dollar and continued to strengthen on Friday towards 1.5850, as the wider increase in risk appetite reduced demand for safe havens. In the UK, the latest report from the Confederation of British Industry showed that industrial orders were stronger-than-expected, rising to the highest level in six months.
Concerns surrounding the export component of the report also eased slightly, as solid demand for UK goods helped improve manufacturing output during the month. The Pound subsequently strengthened for the first time in three days against the Dollar but the UK currency continued to slide versus the Euro, falling to the lowest level in 10-weeks.
Bank of England policy maker David Miles said that he voted for £75 billion of bond purchases this month because the UK economy is in a “precarious situation”. A report on Friday confirmed that the revised estimate of UK economic growth in the fourth quarter contracted by 0.2%. A more extensive decline would have led to a renewed bout of Sterling weakness.
The Pound has dropped over 2% against the Euro last week, as Greece won a €130 billion bailout package, fueling optimism that policy makers will do whatever is necessary to contain the sovereign debt crisis. The UK currency also came under renewed selling pressure, as the minutes from the Bank of England’s last policy meeting showed that two members voted for more quantitative easing than was sanctioned.
There is widespread speculation that the BoE could move to extend bond purchases again over the coming months, a sentiment echoed by the Markets Director Paul Fisher who said that further QE again in May would depend on the economic outlook. It seems that the MPC are keeping an open mind when it comes to implementing further bond purchases and threat of another extension in May will weigh on the Pound.
Elsewhere, there was also a strong reading for UK mortgage approvals according to the latest data, as buyers secured deals ahead of an ending of tax breaks. The Pound bounced back against the Euro to a degree, after six consecutive daily declines, holding firm just under 1.18 after a government report showed that the revised GDP estimate for the fourth quarter confirmed a 0.2% contraction in growth.
A separate gauge of the report showed that business investment fell 5.6% during the fourth quarter, the most since the first three months of 2011 and that will increase fears over the underlying growth outlook, especially as the economy will need increased private-sector growth to offset the pressures of a squeeze on government spending.
Euro / US Dollar
The Euro found solid buying support on dips in the region of 1.3360 and there was further strong buying through the course of the day on Friday, as the single currency pushed towards a fresh 11-week high. There was a renewed sense of optimism that the ECB would be able to maintain greater confidence in the banking sector through the second long-term repo operation due on Wednesday.
This maintain underlying support for the Euro on expectations of strong demand from European banks. The Greek government formally announced its private-sector debt swap, while ECB member Nowotny stated that the Greek loan deal would be positive. His comments proved there is still a lingering doubt that the plan would be implemented and the German parliament is scheduled to vote on the deal today.
In the U.S, the latest economic data failed to have a major impact on the latest rates with the new home sales figures at 321,000, from 324,000 previously, which was largely in line with expectations. The Regional Fed President Bullard expressed some degree of optimism and expected interest rates to be increased in 2013.
EU 09:00 – M3 / 3 Month Moving Average
U.S 15:00 – Pending Home Sales (January)
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