by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound slumped to a fresh six-week low against the U.S Dollar, after the Bank of England minutes from the November policy meeting showed that some officials within the MPC said that an increase in stimulus measures may be needed to quell the exposure to the European sovereign debt crisis. The UK currency also dropped to a six week low versus the Yen, as the MPC voted unanimously to keep quantitative easing capped at £275 billion.
The current purchases are set to end in February and the Pound is under pressure, amid speculation that policy makers will extend the plan as early as next month, as the economic outlook continues to worsen. The dovish tone of the minutes meant the Pound continued to decline against the lower-yielding currencies but the overall level of uncertainty in the market means the UK currency continued to gain against the Australian Dollar and South African – as riskier assets declined in a volatile market.
The Pound also made gains versus the Euro, bouncing back above the 1.16 level, as bond yields in Europe continue to remain at elevated levels. The single currency fell to a six week low against the Dollar, as reports added to concerns that Europe will struggle to find a resolution to the debt crisis. There were reports yesterday that Japanese funds were switching into UK gilts from Euro-zone bonds, which helped underpin support for the Pound against the Euro.
Although some members of the MPC concede that further quantitative easing will probably be required, the panel agreed that there is little point extending the asset purchasing plan until the current run of purchases end in February. The Pound gained support from suggestions that policy makers won’t make a move in December and this offset the decline in risk appetite.
UK stocks declined for an eighth consecutive day, the longest stretch of losses since 2003, which gives you some indication of pessimistic outlook for the global economy. Euro-zone borrowing costs rose again yesterday, after a German bond auction fueled concern that the region’s debt crisis is worsening. RBS Plc and Barclays PLC both lost over 3% in share value on the day, as costs to insure government debt in Europe rose to a record level.
Asian stocks declined earlier in the day, after a report showed Chinese manufacturing may contract this quarter, which saw Rio Tinto shares plunge 2.3% on the day. The benchmark FTSE 100 Index lost 1.3%, extending the loss in November to 7.3%. The Pound is still benefiting from its position outside the Euro-zone as a relative safe haven from the turmoil engulfing the peripheral economies in the Euro-zone and the UK currency may continue to derive support in the near-term.
Bank of England policy maker David Miles conceded there is a strong risk a country may leave the Euro-zone over the coming months and that the threat of the region’s debt crisis has added to the uncertainty surrounding the outlook for the UK economy. The revised GDP data for the third quarter will be released this morning and if growth is revised lower the Pound will come under selling pressure.
Euro / US Dollar exchange rates
The Euro was subjected to fresh selling pressure against the Dollar yesterday, trading down towards 1.33 and the lowest level in six weeks following a much weaker-than-expected German bond auction. The Bundesbank was forced to bid for its own paper as investor demand was very weak. The failed auction increased contagion fears that the debt crisis was spreading to Europe’s largest economy.
There was also a warning from the Greek central bank that Greece was facing its last chance to stay in the Euro-zone and that there was a growing threat of civil unrest could spiral out of control. Ratings agency Fitch warned that France’s credit rating could be under threat if there were further shocks for the economy.
In terms of economic data, there was also a sharp decline in Euro-zone industrial orders, which compounded fears of a recession, especially after the PMI manufacturing index weakened to a two year low. Financial market stresses will continue to dominate sentiment and the increase in risk aversion has helped support the Dollar.
Today’s Exchange Rate Data
U.S – Thanksgiving Day Market Holiday
GER 09:00 – Ifo Business Climate (November)
U.K 09:30 – Revised GDP (Q3)
U.K 11:00 – CBI Industrial Orders (November)
- The Pound remained on the defensive yesterday and slumped to near six week lows against the US Dollar exchange rate
- Pound Euro US Dollar Foreign Currency Forecast – The Pound slumped to a fresh six-month low against the Euro yesterday
- Pound Sterling, the Euro and US Dollar Currency News – The Pound struggled to sustain its momentum above 1.65 against the US Dollar exchange rate and dipped sharply through the course of the week to lows close to 1.6350
- Pound Sterling, the Euro and US Dollar exchange rate News – The Pound has swung between gains and losses in the past week
- Pound Sterling, the Euro and US Dollar exchange rate news flash – The Pound retreated sharply through the course of the week