by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound rallied to a fresh 9-month high above 1.19 against the Euro yesterday and the UK currency remained higher, after a report in the UK showed that jobless claims rose at a slower pace than previously anticipated in November. Claims for unemployment benefits rose 3,000 in November and a revised 2,500 in October, while the jobless rate rose to the highest level in 17-years to 2.64 million.
The Pound has rallied for a third straight day against the Euro, the longest winning streak in over a month, as concern escalated that the Euro-zone government are not doing what’s necessary to find a resolution to the debt crisis and restore confidence in Euro-denominated assets. The UK currency pushed to the highest level since February 18th against the Euro and made gains against 14 out of the 16 most actively traded currencies.
The Pound continues to benefit from its position outside the Euro-zone as a haven from the turmoil engulfing many EU nations. Earlier this month, ratings agencies Standard Poor’s put a credit rating review on 15 EU nations with the intention of a possible downgrade. The Pound has continued to decline against the U.S Dollar though and the Japanese Yen, as global risk appetite continues to weaken and increase demand for the safest assets.
The FTSE 100 Index declined again this morning, while the European Stoxx Europe 600 Index of shares lost 1%. The Euro fell below the pivotal support area of 1.30 against the Dollar for the first time in 11-months, after Italian borrowing costs increased at the latest bond auction and Spanish banks’ borrowings rose by the most in a year.
The single currency also plunged to a 10-week low versus the Yen and the Euro is likely to struggle until a workable solution to the debt crisis is found. The EU summit produced the bare minimum as far as the market is concerned and the Euro has been slipping as a result. The Pound was also unable to make any headway against the U.S Dollar in a risk averse market.
Dollar moves dominated during the course of the day as global risk appetite continued to weaken, which meant the higher yielding currencies like the Australian Dollar and South African Rand lost ground. Markets are expecting a weak retail sales reading in the UK this morning and the Pound may come under a bit of pressure if the report suggests that consumer spending is weakening going into the Christmas period.
There was further evidence of safe-haven demand for the UK government bonds, although the latest auction did see a lower than expected bid/cover ratio, which could suggest that demand is fading at current yields. There was also speculation that the Bank of England would sanction further quantitative easing by February, which will curb Sterling buying support.
Euro / US Dollar exchange rates
The Euro briefly traded at 1.3050 against the Dollar and was subjected to renewed selling pressure once the 1.30 technical support level was broken. There were further concerns over last week’s EU summit on political and economic grounds. Several non-EU countries have expressed doubts surrounding the proposed legislative changes with persistent fears that there would be no economic back-up for fiscal commitments.
The Bundesbank president Weidmann again opposed any form of monetary financing by the ECB with a stark warning over the need to maintain central bank independence and avoid quantitative easing. He also stated that there was growing ECB scepticism surrounding the peripheral bond-purchasing program and was also cautious over the prospect of boosting IMF funding.
There was also another warning that Greece would miss it’s deficit reduction target for this year with markets increasingly concerned over a prolonged recession. Swings in risk appetite will continue to be a major driving force in the market and the Euro is likely to remain under pressure until officials launch a major strategy to resolve the debt crisis.
Today’s Exchange Rate Data
EU 08:58 – Markit Flash PMI – Manufacturing (December) – Services / Composite
EU 09:00 – ECB Monthly Bulletin Published
U.K 09:30 – Retail Sales (November)
EU 10:00 – Employment (Q3)
EU 10:00 – Flash HICP (November)
U.K 11:00 – CBI Industrial Orders (December)
U.S 13:30 – Current Account (Q3)
U.S 13:30 – Empire State Index (December)
U.S 13:30 – Initial Jobless Claims (w/e 10th December)
U.S 13:30 – Producer Price Index (November)
U.S 14:00 – TICS Net Capital Flows (October)
U.S 14:15 – Industrial Production (November)
U.S 15:00 – Philly Fed Business Survey (December)
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