by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound maintained a strong finish to the year against the Euro, rising through major resistance at 1.20 and recording a fresh 11-month high before consolidating below the level by the close of trading. The UK currency also pushed to a high above 1.5750 against the U.S Dollar, equaling the highs of this month. However, a rapid recovery in the Dollar saw the Pound retreat back below 1.57, as swings in risk sentiment continue to dominate market movement.
The Pound remained largely unchanged following the Bank of England minutes, which showed that officials voted unanimously to keep bond purchases on hold. Policy makers also said that the current pace of quantitative easing is close to the market’s capacity and some signaled that further stimulus measures may be required next year to protect the economy from the sovereign debt crisis in Europe.
The Monetary Policy Committee, led by the governor Mervyn King, voted unanimously to keep bond purchases at £275 billion, after increasing the facility by £75 billion in October. The committee also voted 9-0 in favour of keeping interest rates unchanged at a record low of 0.5%, especially with inflation naturally receding over the past two months.
A report earlier this week showed that UK consumer confidence plummeted to the lowest level in almost three years this month, as unemployment rose and hampered household spending. Officials are concerned that the Euro-zone debt crisis will hurt the UK economic outlook, as the government refuses to compromise on the pace of its deficit reduction plan.
Indeed, if the government did reduce spending cuts then ratings agencies would probably slash the UK top rated credit rating. Moody’s have already warned that sluggish growth in the UK may result in a downgrade next year. A separate report yesterday showed that the UK budget deficit narrowed by more-than-expected in November, as tax revenue rose.
Net borrowing fell to 18.1 billion, from £20.4 billion a year earlier. The UK’s Office for Budget Responsibility cuts its growth forecast last month, prompting the Chancellor of the Exchequer George Osborne to borrow more and extend spending cuts to reduce the deficit. The economic recovery has certainly lost momentum in the second half of 2011 and we may see a contraction in growth during the fourth quarter.
Euro / US Dollar exchange rates
The Dollar traded close to its strongest level in 11 months against the Euro before the European Central Bank President Mario Draghi is due to speak today, amid concern that policy makers are struggling to contain the debt crisis. The Euro continued to decline yesterday, as France and Italy prepare to sell debt next week, amid further speculation that France will suffer a downgrade in their credit rating.
There were reports yesterday that the ECB allocated a larger-than-expected €489 billion in funds at the first three-year tender with over 500 banks bidding at 1%. The huge allocation increased speculation that there would be an easing of the debt crisis and that helped limit the Euro’s decline. There was, however, some disappointment over the bond-market reaction, as Italian yields actually increased on the day.
Markets are still doubtful whether the Euro-zone debt crisis could be eased and there was also increased speculation that the medium-term implications of any crisis resolution would be a weaker Euro. The U.S housing data was mixed but markets remain slightly more optimistic about the U.S economy, which helped maintain some yield support for the Dollar.
Today’s Exchange Rate Data
U.K 09:30 Current Account (Q3)
U.K 09:30 Final GDP (Q3)
U.S 13:30 Final GDP (Q3)
U.S 13:30 Initial Jobless Claims (w/e 17th December)
U.S 15:00 Leading Indicators (November)
- The Pound rallied through 1.56 against the U.S Dollar while the Euro found strong support in the region of 1.35
- Sterling Euro US Dollar Foreign Currency Forecast – The Pound encountered strong resistance in the region of 1.6170 against the U.S Dollar
- The Pound declined against the Euro and the Euro rallied higher against the Dollar early yesterday
- Sterling to US Dollar and Euro exchange rates – The Pound declined against the Euro
- Pound Sterling, the Euro and US Dollar exchange rate News – The Pound rallied above 1.14 against the Euro exchange rate