by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound weakened against the Euro and the U.S Dollar yesterday, slipping back under 1.15 versus the single currency and losing over 1% on the day, after a report showed confidence in the labour market outlook fell for a third straight month in September. The gauge fell to the lowest level since February and underlined the fragile nature of the economy, less than a week after the Bank of England resumed bond purchasing to support growth.
The UK currency actually lost ground versus all of the 16 most actively traded currencies, losing the most against the Swiss Franc and Norwegian Krona. The Pound also declined against the higher-yielding currencies like the Australian Dollar and South African Rand, as global risk appetite improved, as UK stocks rallied and posted the biggest four day gain since November 2008.
German and French leaders pledged to approve a plan in the next three weeks to recapitalize banks, boosting traders’ appetite for riskier assets. The benchmark FTSE 100 Index rose 1.8% yesterday and the gauge has rocketed 9.2% higher in last four trading days. The German Chancellor Angela Merkel and French President Nicolas Sarkozy gave themselves until the end of the month to devise a plan to stablise Greece and get the Euro-zone’s economic governance on the right track.
The Bank of England last week boosted the asset purchase plan, referred to as quantitative easing, by £75 billion to £275 billion in a bid to support the economy, which is teetering on the brink of a second recession in three years. Another tranche of quantitative easing only serves to give investors more reason to sell the Pound and with a mixed bag of economic data, it seems increasingly likely that Sterling should depreciate over the coming months.
The Pound suffered the biggest one-day loss against the Euro since October 23rd 2009 and fell 1.8% versus the Swiss Franc. The UK currency maintained a firmer tone against the Dollar, falling just 0.3% by the close of trading last night. The UK currency has benefited from optimism that stresses in the Euro-zone banking sector could be contained, which would also lessen the threats to the UK financial sector.
There is still a high degree of pessimism surrounding the domestic economy, as Bank of England policy makers looked to defend the expansion of the quantitative easing program. Overnight, the latest BRC retail sales report recorded a 0.3% increase in like-for-like sales, which the RICS house price balance remained largely unchanged at -23%.
The Pound will be vulnerable this morning with further reports on the housing sector scheduled for release, while the latest industrial production data will be watched closely. The manufacturing sector slipped into negative growth during the third quarter and a subdued figure is anticipated, as a slowdown in global demand curtails the pace of UK exports.
Euro / US Dollar exchange rates
The Euro continued to advance against the U.S Dollar yesterday and peaked close to 1.37 with the strongest 1-day gain for 12 months. There is further optimism that Euro-zone leaders could re-capitalise the banking sector by the end of the month and the mood of optimism was sustained despite the lack of detail about the plans.
There was uncertainty yesterday surrounding the Solvakia EFSF vote due today, as one of four coalition partners maintained its opposition to the bill. There was also speculation that Spain would miss its 2011 budget targets by at least 1% of gross domestic product. The IMF led Troika announced that it had concluded its talks within Greece and Germany is pushing for a hard Greek default as a condition for providing increased financial support to the Euro-zone as a whole.
U.S trading conditions were largely subdued due to the Columbus day market holiday, but the Euro continued to trade higher overnight, as Asian stocks rallied and reduced demand for the Dollar as a safe haven asset. The U.S currency is also trading close to a one week low versus the Swiss Franc ahead of the Federal Reserve minutes this evening.
Today’s Exchange Rate Data
U.K 00:01 – BRC Retail Sales (September)
U.K 00:01 – BRC Quarterly Manufacturing Survey (Q3)
U.K 00:01 – RICS House Survey (September)
U.K 09:30 – DCLG House Prices (August)
U.K 09:30 – Industrial Production (August) – Manufacturing Production
U.K 15:00 – NIESR GDP Estimate (3 Mths to Sept)
U.S 19:00 – FOMC Publishes Minutes of 20-21 September Meeting