The Pound rallied through 1.56 against the U.S Dollar while the Euro found strong support in the region of 1.35


The Pound rallied through 1.56 against the U.S Dollar while the Euro found strong support in the region of 1.35

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

The Pound rallied through 1.56 against the U.S Dollar yesterday, while the UK currency also traded above 1.15 for a second day versus the Euro exchange rate. Concerns over sovereign debt and the lingering threat of a Greek default means the Pound is benefiting from its relative safe haven status against the Euro. Global stock markets rallied for a second day on optimism that European leaders are nearing an agreement to contain the debt crisis, boosting the appeal of higher-yielding assets and curtailing demand for the Dollar as a hedge against risk.

UK stocks rallied by the most in over 16-months yesterday, amid speculation that European policy makers will shortly announce a plan to contain the debt crisis and stave off the threat of a Greek default. The benchmark FTSE 100 Index rose 4% on the day, which represents the biggest upward surge since May 2010 and extends the three-day rally to 5.6%.

The subsequent improvement in risk appetite has weakened the Dollar and the Yen, as sentiment in global equity markets has changed remarkably over the past week. There seems to be a sudden confidence in the market that European leaders will be able to reach an agreement to successfully contain the debt crisis, but failure to do so of course would increase the level of volatility in the market exponentially.

The U.S Treasury Secretary Timothy Geithner said yesterday that European governments will step up their response to the debt crisis, while the German Chancellor Angela Merkel stepped up her defense of the Euro and toned down calls to punish Greece if more aggressive austerity measures are not introduced to rein in the nation’s budget deficit.

On the FTSE 100 Index last week, more than $3.5 trillion was wiped off the value of the top 100 companies in the UK and the index has lost 13% from February’s high, leaving the FTSE trading at about 9 times the estimated earnings of its companies. With a level of confidence seemingly returning to the stock market, the Pound is likely to make further gains against the Dollar in an environment of risk appetite.

In terms of economic data, concerns over the UK economy and fears over a second recession were enhanced by a report yesterday from the Confederation of British Industry. An index of UK retail sales fell to the lowest level in 16 months in September, which shows the government spending cuts are having a significant impact on households’ disposable income.

UK consumer confidence is plummeting as the economic recovery falters and third quarter growth figures released next month will take on added significance following the anaemic pace of growth during the second quarter. There is real chance that the economy slipped into contraction territory in the three months to September and the BoE will have little option but to extend quantitative easing measures to support growth.

Bank of England policy maker David Miles reiterated comments from Posen and Broadbent in the past week, saying that he was close to voting for additional quantitative easing in September. The recent improvement in the Pound may be temporary leading into the October 6th policy meeting where speculation of further bond purchases will increase.

Euro / US Dollar exchange rates

The Euro exchange rate found strong support in the region of 1.35 against the U.S Dollar yesterday and rallied above 1.3650 by the close of trading, as stocks rallied worldwide and curtailed demand for the U.S currency as a haven. There is increased confidence that European banks will be able to provide additional support through the EFSF fund, which would lessen the immediate risk of debt default.

There was also a strong upward surge in European financial share prices, as panic engulfing the banking sector eased and firmer money supply growth provided support to the Euro. Nevertheless, there is still a high degree of uncertainty over situation and Greek parliamentary approval of the property tax did little to bolster confidence.

In the U.S, the consumer confidence index was relatively unchanged for September and remained close to the lowest levels on record. A separate report showed that house prices fell 4.1% in the year to July, but the overall improvement in risk appetite was the main driving force in the market and the Dollar weakened against the majority of the major currencies.

Today’s Exchange Rate Data

U.S 13:30 – Durable Goods (August)

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