The Pound was unable to sustain a move back above the 1.57 level against the Dollar.
Sterling / Euro and US Dollar exchange rates
The Pound was unable to sustain a move back above the 1.57 level against the Dollar yesterday and retreated once again to near-term support levels in the region of 1.5640. A report from the Confederation of British Industry showed that a survey of retail sales was much stronger-than-expected with a figure of 21 for May from, -6 previously.
There was also a strong reading for June expectations, which helped to boost underlying confidence that the UK economy has not sunk deeper into a recession during the second quarter. Bank of England policy maker Spencer Dale stated that it would take time for quantitative easing to take effect and he expressed caution over sanctioning further easing.
However, there were still expectations that the BoE will move towards further QE over the next couple of months, given that the revised estimate of UK GDP showed a deeper contraction than first feared during the first quarter. There was fresh selling pressure on the Pound, as it plunged to a new low just above 1.55 versus the Dollar.
Defensive considerations will remain very important in the near-term and UK bond yield trends will be watched closely. The Pound lingered around the 1.25 level against the Euro, as the market lacked the impetus to challenge resistance levels in the region of 1.2550. The ongoing Euro-zone debt crisis and particular concerns surrounding the Spanish banking sector means that it’s likely the Euro will remain under pressure in the near-term.
The Pound is still trading within a cent of the highest level in three and a half years against the Euro, after Spain said it may need to sell bonds to aid the banking rescue. The UK currency is still regarded by investors as a relative safe haven, despite the recent negative spate of economic data. The Pound has appreciated 2.8% this year on a trade weighted basis, the best performer of the 10 developed-nation currencies.
Euro / US Dollar
The Euro pushed to a high in the region of 1.2580 against the Dollar yesterday, but was unable to break 1.26, as selling pressure resumed ahead of the U.S open. Spanish bond yield spreads widened to a fresh record high of over 515 basis points over German bunds, which reinforced fears over the Spanish economic outlook.
There were further uncertainties surrounding the proposed bailout for Bankia and the ECB indicated that the proposed bailout plan of issuing bonds would not be accepted, which further damaged confidence. There was speculation that Spain could require a bailout if yield spreads continue to widen and that is likely to keep the Euro subdued.
In the U.S, the Case-Shiller house price index was broadly in line with initial estimates with a decline of 2.6% in house prices in the year to March. There was also an unexpected decline in consumer confidence to 64.9 for May, from a revised 68.7 the previous month. Later in the day, a downgrade to Spain’s credit rating sparked demand for the Dollar as a safe haven.
Data Released Today
EU 09:00 M3 / 3Mth Moving Avg. (April)
U.K 09:30 Mortgage Approvals (April)
EU 10:00 EC Economic Sentiment / Business Confidence (May)
– Industrial / Services / Consumer
U.S 15:00 Pending Home Sales (April)
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