The Pound rallied against the Euro exchange rate for a third straight trading day

Foreign Exchange Rates Currency News - The Pound was generally weaker against the Dollar following the U.S non-farm payrolls report

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

The Pound rallied against the Euro for a third straight trading day, as speculation spreads that the EU leaders struggling to contain the sovereign debt crisis. The European Central Bank cut interest rates last week in an effort to boost growth but the EZ economy is seemingly edging closer towards recession. The Greek Prime Minister George Papandreou has agreed to step down and allow for the creation of a coalition government, while Italy’s borrowing costs surged to a European record as the pressure increases on the Prime Minister Silvio Berlusconi ahead of today’s parliamentary vote.

Last week, the Pound enjoyed its biggest weekly gain against the Euro since January and despite the bleak nature of UK economic data, the market’s focus is firmly on the problems in the Euro-zone. The Pound is also benefiting from its position outside the Euro-zone and demand for Sterling has increased as a haven from the turmoil.

It is certainly fair to say that the Pound’s upward surge is being driven solely by the stresses within the Euro-zone and from that point of view Euro buyers may be advised to take advantage of the current rate, before the focus switches back to the UK economy. Economists predict that UK economic growth will slip into contraction territory during the fourth quarter, while the Bank of England is expected to step up quantitative easing measures.

The Pound gained against the Euro even after Lloyds Bank Corporate Markets said that confidence in the outlook for employment fell for a third straight month in September. A measure of consumer sentiment also fell for a fourth straight month in October and a measure of job security fell two points to minus 23. The Pound again found support on dips below the 1.60 area versus the Dollar and pushed to highs around 1.6070 before drifting weaker again on swings in risk sentiment.

A report from the British Retail Consortium showed that the latest sales data recorded a sharp 0.6% decline in the year to October, as discretionary spending fell while the RICS house price index was relatively unchanged from the previous month. The data will do little to inspire confidence surrounding the UK economic outlook and recession fears will be an important focus over the coming weeks.

For now, the Pound is continuing to be driven to a large extent by international trends with further defensive flows into the UK bond market, as concerns in Europe continue to escalate. This trend is likely to continue in the short-term, although any resolution to the crisis would risk substantial capital outflows and provoke much higher Sterling volatility.

Euro / US Dollar exchange rates

The Euro slumped for as second day against the lower-yielding currencies like the Dollar and the Yen, ahead of the Italian vote of confidence today and pressure on the Prime Minister Berlusconi to resign, stoking concern that the region’s third largest economy will struggle to manage its debt. The Euro also came under pressure, after the ECB’s Juergen Stark said the debt crisis will be under control in two years.

European finance ministers have pledged to roll out an enhanced rescue package next month. Greece has been ordered to provide written acceptance of bailout to win a €8 billion loan installment by the end of November, while Italy has pressed ahead with budget cuts. The Euro found support below 1.37 against the Dollar yesterday, as political tensions dominated.

The Euro-zone economic data offered little support with the Sentix investor confidence indicator weakening to a two-year low, where there was a 0.7% decline in retail sales for October. There was also a 2.7% drop in German industrial production following the large decline in orders recorded last week. The U.S data was of secondary importance through the course of the day, but the Dollar will continue to be strong on defensive demand.

Today’s Exchange Rate Data

U.K 00:01 – BRC Retail Sales (October)

U.K 00:01 – RICS House Survey (October)

U.K 09:30 – Industrial Production (October) – Manufacturing Production

U.K 15:00 – NIESR GDP Estimate (3 Mths to October)

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