The Pound rallied from a low just above 1.56 against the US Dollar Exchange Rate

Foreign Exchange Rates Currency News - The Pound rallied from a low just above 1.56 against the US Dollar Exchange Rate

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

The Pound rallied from a low just above 1.56 against the Dollar yesterday, rising for the first time in two days, as global risk appetite improved following speculation that European leaders are close to finding a resolution to the sovereign debt crisis. European stocks and global commodity markets rallied, increasing demand for riskier assets and reducing the appeal of the Dollar as a haven.

The UK currency also rose against the Yen but continued to decline against the Australian Dollar and South African Rand, as confidence continued to flow into the market. The Aussie and Kiwi have both weakened significantly in the past month on concerns that the European debt crisis will prompt a global recession, reducing demand for risk.

The Pound also found support domestically, as a UK index of services-sector growth unexpectedly rose in November. The Italian Prime Minister Mario Monti proposed €30 billion of austerity measures over the weekend, while the German Chancellor Angela Merkel will meet French President Nicolas Sarkozy today before the EU summit on December 9th.

The Euro may come under renewed selling pressure in the build up to Thursday’s interest rate announcement with the ECB expected to cut rates by a further 25 basis points. The cautious mood of optimism is very fragile and risk sentiment could deteriorate rapidly on any sign that officials will struggle to find a resolution and prevent a systemic crisis.

The Canadian Dollar continued to rally strongly against the majors and it is thought the Loonie is gaining momentum as a relative safe haven from the Euro-zone debt crisis and ongoing tensions in the U.S over budget deficits and political indecision. The U.S is struggling to manage its $1.3 trillion budget deficit and has already lost its AAA credit rating this year.

Whereas, Canada can use rising commodity prices and spending cuts to reduce its deficit within five years. To that end, the Bank of Canada is expected to lead the interest rate increases next year among the Group of 10 countries. The Pound found support below 1.56 against the Dollar and pushed sharply higher towards the close of trading last night with a peak above 1.57.

A report from the British Retail Consortium last night showed that an index of sales was weaker-than-expected with a 1.6% annual decline, the weakest reading in six months. Credit-rating warnings in the Euro-zone member countries continued to provide important initial Sterling support, but the backing could be short-lived given the risk that the UK AAA rating could come under threat.

Euro / US Dollar exchange rates

The Euro consolidated above 1.34 against the U.S Dollar yesterday and edged higher through the course of the day with a peak above 1.3480, as risk appetite continued to improve. The European economic data was broadly in line with initial expectations with a fifth consecutive decline in the EU Sentix index and there was a small downward revision to the services PMI.

There was, however, a renewed sense of confidence in the market with a significant decline in European bond yields, after the Italian austerity package was approved. The Euro is under pressure this morning though, after ratings agency Standard Poor’s stated that there were important risks to European sovereign credit ratings, especially France.

There were also expectations that the ECB would adopt a more dovish tone at Thursday’s press conference and speculation of 25 basis cut in European interest rates. In the U.S, the ISM services sector index was weaker-than-expected with a decline to 52 in November, from 52.9 previously. Orders gained marginally for the month, but there was an unexpected drop in the employment index.

Today’s Exchange Rate Data

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

EU 10:00 – Revised GDP (Q3)

GER 11:00 – Industrial Orders (October)

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