by Adam Solomon
Sterling / Euro and US Dollar exchange rates
Following on from last week, the Pound rallied strongly against the Euro exchange rate on Thursday, rising up through 1.16, after the European Central Bank unexpectedly cut interest rates to 1.25% in the new chairman Mario Draghi’s first meeting. UK government bonds fell and stocks rose, as G-20 leaders met to discuss the Euro-zone debt crisis and Greece withdrew a plan for a referendum in the nation’s rescue package.
The FTSE 100 Index of leading UK shares jumped 1.5%, after declining by an equal amount earlier in the day. The level of volatility and uncertainty in the market is set to continue with the outcome of the Euro-zone problem still highly questionable. The fact that Greece will not be holding a referendum has provided a measure of stability to European stocks and the Euro bounced back towards 1.15 versus the Pound on Friday.
The UK currency found support on dips below 1.59 against the U.S Dollar and pushed back to challenge resistance levels above 1.60 as wider volatility ensued. The latest PMI services-sector report was weaker-than-expected with a decline to 51.3 in October, from 52.9 the previous month. Economists had predicted a result of 52.0 but the decline will fuel concerns that the economy is weakening in the fourth quarter and may slip into contraction.
There was an underlying mood of caution within the report and inflationary pressures eased, although there was also a modest improvement in business confidence. Markets remained extremely anxious over the UK economic outlook, especially given the negative impact of Euro-zone stresses and further fears over recession conditions.
There were defensive capital outflows into the Pound as a haven from the turmoil in the Euro-zone, which continued to dominate through the course of the day. There will still be fears surrounding the threat of capital outflows from the banking sector, given the pressure on European banks to raise capital and this could still be a crucial factor for the Pound.
The European interest rate cut has almost paled into insignificance considering other factors that are affecting the market. The Greek Prime Minister George Papandreou faced a vote of confidence on Friday and on Sunday agreed to finally step down. The Euro finished the week on the front foot now the threat of a referendum has been taken off the table but trading conditions will remain volatile given the level of uncertainty in the market.
The Pound was generally weaker against the US Dollar exchange rate following the U.S non-farm payrolls report on Friday, while the Euro was subjected to fresh selling pressure towards the close of trading on renewed concerns surrounding Italy. There was some speculation that the Bank of England could move to expand quantitative easing measures at this week’s MPC meeting, which may unsettle the Pound through the course of the week.
In terms of economic data, industrial production data for September is likely to show a decline in the sector, which will feed into concerns over the broader economy. Meanwhile, other economic indicators for October could add to concerns that the unexpected bounce in quarter three economic growth will not be sustained in the fourth quarter.
The British Retail Consortium is expected to announce weak retail sales for the month, while no improvement is expected in the RICS house price balance or the Halifax annual rate of house price decline. Producer price data for October is also expected but the Pound will be susceptible to international events.
Euro / US Dollar exchange rates
The Euro weakened against the Dollar and extended its weekly decline on Friday, as choppy trading conditions and the level of uncertainty weighed on risk sentiment and spurred demand for lower yielding currencies. The ECB cut interest rates for the first time in over two years and there was strong speculation that the Greek Prime Minister would resign ahead of the weekend.
The incoming ECB President Mario Draghi justified the decision to cut interest rates on the back of a weakening economic outlook and expectations of a mild recession at the end of 2011. Draghi adopted a fairly orthodox stance on monetary policy and said he’d rather cut rates than resort to a form of quantitative easing.
The Euro weakened sharply following the announcement before recovering later in the day. Papandreou abandoned the idea of holding a referendum, amid internal party dissent, while Italian and Spanish bond yields retreated from peak levels, but Italian bonds were still above 6.2%, raising fears surrounding austerity measures within Italy.
There was a further strong suspicion of capital repatriation by weaker European banks, which was putting underlying upward pressure on the Euro. The Euro was also unsettled by weak Euro-zone data, as there was a further deterioration in the services PMI for October and there were particularly weak readings for Italy and Spain.
The headline U.S employment data was slightly weaker-than-expected with an increase in payrolls to 80,000, although this was offset by an important revision to 158,000 for September. The jobless rate also edged lower to 9% from 9.1%. The Euro looked to advance initially as risk appetite improved but was unable to hold onto the gains as concerns in the Euro-zone surfaced again.
Today’s Exchange Rate Data
EU – Eurogroup/EU Finance Ministers Meetings (Continues to Tuesday 8th)
EU 09:30 – Sentix Index (November)
EU 10:00 – Retail Sales (September)
GER 11:00 – Industrial Production (September)
U.S 20:00 – Consumer Credit (September)
- The Dollar continues to decline against the majors as we build up to the release of the Non Farm Payrolls report
- Foreign Exchange Daily Insight – Dollar looses further ground against Sterling in the lead up to this afternoon’s Non-Farm Payrolls report
- Pound Sterling, the Euro and US Dollar exchange rate News – The Pound traded higher against the U.S Dollar exchange rate
- Pound Sterling, the Euro and US Dollar Currency News – The Pound declined to 1.6113 against the US Dollar exchange rate on Friday
- Pound Sterling, the Euro and US Dollar exchange rate News – The Pound received a timely boost yesterday, rising back up through 1.13 versus the Euro exchange rate