by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound has surged upwards towards a 2011 high versus the Euro, amid concern that the European rescue plan will fall apart and the ECB will be forced to cut interest rates. The single currency also came under significant selling pressure versus the U.S Dollar and fell by the most in two weeks versus the Yen, after the Greek Prime Minister George Papandreou pledged to put the EU’s latest bailout package to a referendum.
His actions risk putting Greece into default if rejected by voters and the uncertainty in the market instigated a flight to safety for investors, as the Dollar was among the biggest gainers on the day. Stock markets tumbled worldwide earlier in the day, after a report showed that Chinese manufacturing had slowed. The Australian Dollar also weakened significantly, as the RBA cut interest rates to help support the faltering economy.
In the UK, the latest growth figures showed that the economy actually grew by more-than-expected in the third quarter at 0.5%, compared to 0.1% in the three month through June. The Pound has been under pressure through speculation of a third quarter contraction but the positive result is tempered by suggestions that the UK economy is still facing a double-dip recession, as Europe’s debt crisis intensifies.
The Bank of England has renewed the quantitative easing plan in the past month to boost lending conditions and support growth but economists still expect GDP to contract in the fourth quarter and first quarter of 2012, equating to a technical recession. A separate report showed that UK manufacturing slumped in October by more than initial expectations and the third quarter growth figures may be treated as a one-off following a surprise improvement in services industries over that period.
The Pound is trading close to the highest level against the Euro this year but has faltered against the Dollar, trading back under 1.60 to a low of 1.5892. Euro buyers may wish to take advantage of the current rate or consider a stop order at 1.15 to protect against a reversal with Sterling vulnerable to selling pressure if the economic outlook continues to deteriorate.
A stop order means that you can secure a worst case scenario of 1.15 for example but if the rate continues to trend higher, then you have the option of benefiting from a better rate. Essentially, it takes the risk of a sudden decline out of the equation, while maintaining hope that the Euro will keep getting weaker. Bank of England Markets Director Paul Fisher has said the pace of growth in the third quarter may not be sustained and there’s a chance of stagnation in the current quarter.
An index of UK manufacturing fell into contraction during October, plunging to a level of 47.4, from 50.8 in September. A reading above 50 indicates growth. A gauge of UK services sector growth will be published on Thursday and there will be speculation of a decline from 52.9 in September, which could weaken the Pound.
Euro / US Dollar exchange rates
The Euro weakened for a third straight day against the U.S Dollar yesterday and dipped to a low of 1.3660 before a technical recovery later in the day. The announcement of a Greek referendum continued to have a major negative impact on the Euro and risk sentiment as a whole, especially as it puts last week’s EU summit deal under severe jeopardy.
The Euro also declined by the most in two weeks versus the Yen on risk sentiment and weakened versus all of the 16 most actively traded currencies, amid speculation that the ECB will cut interest rates on Thursday to support the economy and improve lending. The Euro recovered marginally towards the close of trading last night, after a Greek political official said the vote was “basically dead”.
There was strong criticism for Greece from other EU nations and concerns increased that the EFSF would find it difficult to attract funds, making the chance of Chinese investment all the more unlikely given the prevailing uncertainty surrounding the situation. There was also a fresh surge in Italian bond yields during the day, rising significantly above the 6% level.
In the U.S, the PMI index for manufacturing dropped to 50.8, from 51.6 in September and there were mixed readings for sub-components of the report, as orders improved and inventories declined. The FOMC statement and Fed chairman press conference will be important today for sentiment. There is speculation that the FOMC will signal its intent to engage in further quantitative easing if required, although no action is expected at this meeting.
Today’s Exchange Rate Data
GER 08:55 ILO Unemployment (October)
EU 09:00 Manufacturing PMI (October)
U.S 11:30 ADP Employment Report (October)