by Adam Solomon
Sterling / Euro and US Dollar exchange rates
Following on from last week, the Pound continued to decline against the high-yielding currencies, falling back towards 1.52 against the Australian Dollar and slipping under 13.00 versus the South African Rand. Sterling moves continue to be dominated by international developments, after news broke on Wednesday of a coordinated action between major central banks around the world to improve liquidity.
The Pound pushed to a high above 1.5750 against the U.S Dollar as risk appetite improved and stock markets rallied. The UK currency will remain very sensitive to developments within the banking sector and any improvement in financing conditions should provide net support. There will still be a high degree of uncertainty over the economic outlook, especially given the government’s warning over the risk of another credit crunch.
The budget and growth outlook will be watched closely over the coming weeks and there is still a risk of the UK moving to an unsustainable medium-term position in the event of another recession, which would result in multiple credit rating downgrades and further Sterling losses would inevitably follow. UK gilts fell for a second day, amid reports of successful bond auction in Spain and France, which reduced the appeal of the Pound as a haven.
The Pound is likely to benefit from an environment of risk appetite, even as a report on Thursday showed that UK manufacturing contracted in November at the fastest pace since June 2009. The Bank of England governor Mervyn King has urged banks to enhance efforts to bolster their defense against the debt crisis in the Euro-zone, describing it as “systemic.”
The Pound found support on dips towards 1.5650 against the Dollar towards the close of trading on Thursday, but was unable to break higher. The manufacturing data also showed a further decline in orders and the rate of the decline in employment was also the highest for over two years, which maintained fears surrounding the economic outlook.
The Bank of England has been counting on the weaker Pound to bolster UK exports and help drive the economic recovery, as the government continues to embark on its biggest fiscal cuts in a generation. The BoE, Federal Reserve and four other central banks pledged last week to lower the cost of emergency Dollar funding by 50 basis points to improve liquidity.
There will still be unease surrounding the UK banking sector and the impact on lending and that will continue to affect the Pound. It would also be dangerous to believe that Sterling will continue to derive defensive demand from the crisis in the Euro-zone and volatility is liable to increase. Swings in risk sentiment will continue to drive the market in the near-term and the Pound may decline once again against the Dollar if stocks begin to deteriorate.
The Pound maintained a firm tone ahead of the U.S non-farm payrolls data on Friday, but traded back towards 1.56, after the report showed the U.S economy added 120,000 jobs in November, after a revised 100,000 increase the previous month. The main surprise was the unemployment rate which declined to 8.6% for the month, from 9% previously.
In the UK, the PMI index for construction sector declined to 52.3 for November, from 52.9 the previous month, which was broadly in line with market expectations. The services sector data will be watched closely this morning and a weaker-than-expected reading would increase fears of a recession. The Bank of England is due to meet on Thursday and we do not expect any changes in policy before year end but there is an increased likelihood of further quantitative easing in the short-term.
Euro / US Dollar exchange rates
The Euro traded in narrow ranges against the Dollar on Thursday with a phase of consolidation following sharp gains triggered by the central bank moves on Wednesday. There were many political comments ahead of this week’s EU summit, as the French President Sarkozy warned over the efforts required to prevent a break-up of the Euro-zone.
The U.S PMI manufacturing data was stronger-than-expected with an increase of 52.7 for November, from 50.8 previously and there was a significant recovery in both the orders and prices components of the report, which continued to suggest that the economy is making some headway. There were fresh reports that the ECB would provide up to €200 billion in loans to the IMF with the funds then used to support the peripheral Euro-zone economies
There was a sharp decline in bond yields during the day on Friday, as Italian and Spanish markets rallied and this also helped support the Euro. However, the mood of optimism remains fragile as speculation emerged of a Spanish credit rating downgrade, which undermined sentiment. The Italian cabinet approved the latest austerity measures, boosting optimism that a deal could be reached.
Today’s Exchange Rate Data
EU 08:58 – Markit Services PMI (November) – Composite
U.K 09:30 – CIPS Services PMI (November)
EU 09:30 – Sentix Index (December)
EU 10:00 – Retail Sales (October)
U.S 15:00 – Factory Orders (October)
U.S 15:00 – Non-Manufacturing ISM (November)
- The Pound declined against the US Dollar Exchange Rate to a low of 1.5750
- Exchange Rate News – The Pound rallied to a high above 1.65 against the U.S Dollar
- Foreign Currency Exchange Rate Forecast – The Pound rallied to a high of 1.1450
- Pound Sterling to US Dollar Foreign Currency Exchange Rate Forecast – Sterling hits 15 month high…
- The Pound rallied to a fresh high above 1.17 against the Euro exchange rate