by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound took advantage of broad Euro exchange rate weakness, rising through 1.16, despite speculation that the Bank of England may be preparing to implement further quantitative easing measures in Thursday’s announcement. A number of MPC policy makers have publicly declared the need for additional support as the economy slips towards contraction in the third quarter. The Pound traded lower against the Dollar, falling back towards the lowest level since January, while the UK currency made gains versus the Australian and New Zealand Dollars as risk appetite declined.
The UK PMI manufacturing index rose to 51.1 in September, from 48.9 the previous month, above the level to indicate growth in the sector, which will help alleviate immediate concerns surrounding the industrial outlook. Underlying sentiment will remain extremely weak, especially considering speculation that the BoE will sanction additional stimulus measures this week.
The Pound maintained a firmer tone against the struggling Euro, as Standard Poor’s preserved its AAA credit rating for the UK and also confirmed the outlook as stable, which will provide some relief for the Pound, especially with an important focus on the Euro-zone credit ratings. The UK has enjoyed a relative safe haven status from the turmoil engulfing much of the Euro-zone and that has been the catalyst for the Pound’s advance against the Euro.
The Pound has fallen against the higher-yielding currencies this morning in the build up to the construction data, weakening against 11 out of the 16 most actively traded currencies. The decline in construction will highlight the need for the Bank of England to renew quantitative easing measures this month, as the economy sinks towards contraction.
The Pound fell the most against the New Zealand overnight, but a decline in Asian stocks and the overall sentiment towards risk means that the higher-yielding currencies are likely to weaken further. In the September minutes, the BoE said that it is becoming “increasingly probable” that another round of government bond-purchases may be needed to boost the economy.
The unlikely improvement in UK manufacturing had a muted effect on the market as traders judged it to be insufficient to prevent the BoE from adding more stimulus to the economy. The stable outlook on the nation’s debt rating reflects SPs expectation that the government will implement the bulk of its fiscal austerity program.
Euro / US Dollar exchange rates
The Euro exchange rate plunged to the lowest level in eight months against the U.S Dollar yesterday, as European finance ministers weighed up the threat of a Greek default, as the struggling nation announced fresh austerity measures to warrant the next tranche of loan support. The Euro also fell to a decade low versus the Yen, as the investors sought lower-yielding currencies to offset the level on risk in the market.
There were further concerns surrounding the Greek debt situation following the admission that the 2011 budget deficit will miss the 7.5% of gross domestic product target, potentially reaching at least 8.5%. The admission will make it more difficult for the IMF to issue a favourable report on Greece and any decision to do so will be seen as a political decision.
There were also fresh reports that the Greek Prime Minister Papandreou was considering resigning, which only served to further unsettle market confidence and weaken the Euro. There is speculation that European banks are struggling under the weight of toxic debt and in this context a Greek default may be delayed so banks have more time to prepare.
Today’s Exchange Rate Data
EU 10:00 – Producer Price Index (August)
U.S 15:00 – Factory Orders (August)