by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound rallied back towards 1.17 against the Euro yesterday, while the UK currency bounced back towards 1.56 versus the U.S Dollar, ahead of the Chancellor’s Autumn budget to Parliament. George Osborne quoted the OBR in saying that the UK won’t suffer another recession but UK economic growth will be slower than previously forecast this year and in 2012, which will force the government to borrow more and increase fiscal spending cuts.
The Chancellor predicts that the economy will expand 0.9% this year, despite previous forecasts of 1.7% in March, and by 0.7% in 2012, less than half what was previously expected. The budget deficit will reach £120 billion in the financial year ending in March 2013 and the government will have little option but to extend cuts, which would increase unemployment and weigh on households’ disposable income.
Osborne also talked about the UK’s vulnerability to the sovereign debt crisis engulfing the Euro-zone, saying that a recession in Europe would create further problems in the UK. The Opposition jumped on the downgrade to growth expectations, saying further cuts would add to unemployment, erode consumer confidence and fail to reduce borrowing. If the UK misses its deficit-reduction targets, then the UK may be susceptible to a cut in the AAA credit rating, which would have major ramifications, including weakening the Pound’s position.
The Pound pushed sharply higher with a break above 1.5505 against the Dollar, which triggered a further advance towards 1.5650. There were also strong gains for the Pound against the Euro with a move above 1.17, despite the generally pessimistic outlook from the Chancellor yesterday and the planned strike action for public services today.
The immediate market impact from Osborne’s announcement was measured, as the adjustments in the economic forecasts were broadly in line with initial estimates. There was, however, a statement from ratings agency Fitch that the revised UK projections involved a significant deterioration and there was a clear warning that the credit rating could come under pressure.
The Pound has reacted well to the revisions in growth and the UK currency strengthened against the Euro, after reports emerged that the ECB had failed to “sterilize” its bond program at least four times previously. This is the first time it has happened since the ECB expanded the bond purchasing program to purchase Italian and Spanish bonds.
In terms of economic data, the Pound also found support from reports that the Nationwide housing market index rose 0.4% in November with the average cost of a home rising to £165,798. Home values increased 1.6% from this time last year, while a separate report showed that mortgage approvals increased more than initial estimates, as record low interest rates helped support the market.
Euro / US Dollar exchange rates
The Euro found support in the region of 1.33 against the U.S Dollar and peaked around 1.3450 by the close of trading last night. There was some temporary relief for the Euro, amid reports of solid buying support at the latest Italian bond auction, even though there was a further rise in yields. Italian government bonds plunged towards a Euro-zone record low, amid concerns that officials are struggling to contain the debt.
Spanish 10-year bonds also fell for the first time in three days, after Euro-zone finance ministers said more work is needed to enhance the role of the IMF in fighting the debt crisis. German bonds rallied for the first time in six days, after Standard Poor’s cut the ratings of lenders including Bank of America Corp, Goldman Sachs Group Inc and JP Morgan Chase Co.
The Euro’s mini-rally didn’t last too long as speculation increased that the ECB would effectively move towards quantitative easing, especially as there was further pressure for the bank to increase its Euro-bond purchases to help support the Euro. The speculation over QE triggered renewed selling pressure on the Euro and there was also talk of another interest rate cut.
Today’s Exchange Rate Data
GER 08:55 – Unemployment (October)
EU 10:00 – Flash HICP (November)
EU 10:00 – Unemployment (October)
U.S 13:15 – ADP Employment Report (November)
U.S 14:45 – Chicago PMI (November)
U.S 15:00 – Pending Home Sales (October)
U.S 19:00 – Federal Reserve Beige Book
- The Pound declined against the Euro and the Euro rallied higher against the Dollar early yesterday
- Pound, Euro US Dollar Currency Forecast – The Pound initially rallied against the majors yesterday in the foreign exchange rate markets
- Sterling Euro US Dollar Foreign Currency Forecast – The Pound rallied from a low of 1.1481 against the Euro yesterday
- The Pound strengthened against the Euro Exchange Rate yesterday
- Pound Sterling, the Euro and US Dollar exchange rate News – The Pound rallied above 1.14 against the Euro