The Pound strengthened against the Euro and the US Dollar exchange rates

Foreign Exchange Rates Currency News - The Pound strengthened against the Euro and the US Dollar exchange rates

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

Following on from last week, the Pound strengthened against the Euro and the U.S Dollar on Thursday, following a report from the Office of National Statistics, which showed that UK retail sales unexpectedly rose in October. The increase in sales came despite consumer confidence plunging to record lows in the same month, as government spending cuts and rising unemployment clouded the economic outlook.

Sales rose 0.6% from September, which represents the biggest monthly increase since June, but the pace of spending is unlikely to be sustained at this level, after the drop in UK consumer confidence. Inflation has also outpaced wage growth and the Bank of England has warned that the economy faces a weaker outlook over the coming year.

The Central Bank stepped up bond purchasing last month and there is renewed speculation that the BoE will extend quantitative easing measures as early as next month, as concerns grow about the UK’s exposure to the European sovereign debt crisis. Data released earlier in the week showed that the number of unemployed people rose to 2.62 million in the third quarter, the most since 1994.

The Pound was unable to sustain its advance through 1.5770 versus the U.S Dollar, as the FTSE 100 Index declined for a fourth straight day, increasing the demand for the safest assets. The benchmark FTSE 100 Index lost 1.6% in the day, extending this year’s decline to 8.1%. The Pound continued to make gains against the Euro, as Spain’s borrowing costs surged to a record high at 7%, as the debt crisis spreads from one high deficit nation to the other.

Italian government bonds continued to rise last week, amid speculation that the European Central Bank was said to be buying securities and German Chancellor Angela Merkel called for political action to find a resolution to the debt crisis. French bonds rallied after the nation sold almost all of the maximum amount on offer at Thursday’s auction.

The Pound found support in the region of 1.57 against the Dollar and tested resistance just above the 1.58 level, although it was unable to sustain its advance. Bank of England policy maker Martin Weale stated that there was a strong case for further quantitative easing, which will maintain fears that the MPC could act as early as next month.

The banking sector will inevitably be an important focus in the short-term, especially with an increase in financing pressures. There will be fears that the banks will cut back on lending, which will further undermine growth in the UK economy. There will also still be fears of a withdrawal of funds by the European banks, which may increase selling pressure on the Pound.

The Pound rallied strongly against the U.S Dollar on Friday, however, as gains in global stock markets dampened demand for the safe haven currencies. The UK currency rose above 1.58, while the Pound weakened versus the Euro, amid speculation that European leaders are increasing efforts to fight the sovereign debt crisis and restore confidence in European bond markets.

Bonds in Italy and France rose, amid suggestions that the ECB has stepped up purchases this week and the Euro subsequently gained ground versus the Pound and the Dollar. Swings in risk sentiment will continue to be an important focus in the market, but the developments in the Euro-zone will remain the key driver of the market and risk appetite.

The Pound is still gaining defensive support from its position outside the Euro-zone and there will be further support from an intensification of Euro-zone stresses. This support could prove to be extremely fragile, given the UK debt problems and dependence on overseas funding for the banking sector. In this context, sentiment towards the Pound could reverse quickly.

Euro / US Dollar exchange rates

The Euro rallied against the Dollar and the Pound on Friday, as Italian bond yields declined and reduced fears over the European debt crisis worsening. The single currency bounced back, rising from five week lows against the Dollar and the Yen, as the ECB bought more Italian government bonds in an attempt to bring stability to European markets.

The Australian and New Zealand Dollars both fell significantly last week, as risk appetite deteriorated with the former falling below parity with the U.S Dollar for the first time in over a month. The Euro also stood firm despite a weak Spanish bond auction, which pushed yields higher, while French yield spreads over German bunds also rose to fresh record highs.

The new Italian Prime Minister Monti announced a comprehensive reform package for the Italian economy, although measures would only have an impact in the longer term. In the U.S, the weekly jobless claims data was again better-than-expected with a decline to fresh seven month lows, while the Philly Fed Index dropped sharply from the previous month.

The Euro continued to strengthen through the day on Friday, amid media reports that a plan to increase ECB lending to the IMF, which would then allow the IMF to buy peripheral bonds, was gaining momentum. The speculation helped increase optimism that there would be relief for high deficit economies and pushed the Euro higher.

Today’s Exchange Rate Data

EU 09:00 – Current Account (September)

U.S 15:00 – Existing Home Sales (October)

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