by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound weakened against the U.S Dollar and the Japanese Yen exchange rates, trading back towards 1.5550 overnight on Thursday, as a drop in Asian stocks spurred demand for the safe haven assets. The UK currency still poised to record its first weekly gain in six weeks against the Dollar, after a report showed that UK consumer confidence rose for the first time in four months.
An index of sentiment gained 1 point from August to minus 30, as Britons became more optimistic about the outlook for spending. A measure of households’ expectations for the economy over the coming year rose 4 points to minus 27. Despite ongoing concerns about the state of the global economy, the report will provide some optimism that consumer spending will improve over the coming months.
The increase in September stops the rot but still leaves confidence 10 points lower than September 2010. The Bank of England’s monetary policy committee has indicated that they are becoming increasingly concerned with the slump in economic activity during the third quarter and expect the recovery to slow further, causing a probable contraction in growth.
As a result, three policy makers have publicly backed suggestions that further stimulus through additional quantitative easing will be required. The Pound is likely to weaken in the build-up to the October 6th interest rate announcement, amid speculation that the MPC will expand the bond purchasing plan as early as this week, despite data showing improved consumer confidence and mortgage approvals at the highest level in 20 months.
The latest Nationwide House price index was almost in line with expectations, recording a 0.1% gain for September following a revised 0.6% decline the previous month. The lending data was also marginally stronger-than-expected although the impact in the market was limited. The Swiss National Bank announced that it would increase the proportion of reserves held in Sterling, which helped boost the Pound against the majors.
The move by the SNB increased the potential for Sterling to be seen as an attractive reserve asset and it pushed to 1.57 against the Dollar before selling off again overnight. There is still an underlying lack of confidence in the UK economic outlook with further speculation that fiscal policy might have to be adjusted to counter a sharp slowdown in the economy.
The Pound strengthened significantly against the New Zealand Dollar last week, as the Kiwi fell to its lowest level in six months against the U.S Dollar. Standard Poor’s joined Fitch Ratings in cutting the country’s credit rating, adding to concern that borrowing costs will increase. The Kiwi was trading lower against all of the 16 most actively traded currencies, as a survey also showed that business confidence fell in September.
The Stoxx Europe 600 Index of shares slipped 0.9% in early trading on Friday, while the FTSE 100 Index dropped 1%, weakening demand for the higher-yielding currencies even more, as the Australian Dollar also traded at 1.60 versus the Pound.
Nevertheless, the Pound continues to trend higher versus the Euro, despite speculation that the Bank of England will implement additional quantitative easing measures as early as Thursday. The focus seems to be fixed on the problems associated with sovereign debt in the Euro-zone and the underlying threat of a Greek default.
Euro / US Dollar exchange rates
The Euro exchange rate encountered strong support in the region of 1.36 against the U.S Dollar, as investors bets increased that leaders in the region will agree on measures to aid member nations that are struggling to pay their debts. The German parliament approved legislation to give the EFSF more powers with a strong majority support, as total dissenters were kept below 90.
There was certainly a degree of relief that the vote had been passed and Merkel’s government is also safe in the short-term. Markets will now focus on six other countries where the EFSF legislation has yet to be ratified. There were no major developments surrounding Greece during the day, as the IMF resumed its meetings and the Cabinet met on Sunday to announce further austerity measures.
The latest U.S initial jobless claims was better-than-expected with a decline to 391,000 in the latest week, from 428,000 previously and this was only the second reading below 400,000 since April. The latest GDP revision was also slightly better than previous estimates, which improved risk appetite during the day and weakened the Dollar.
The latest German retail sales data was sharply weaker-than-expected, which continued to weaken the Euro, with a 2.9% August decline following a revised 0.3% the previous month. Although there had been a very strong figure for June, the data renewed concerns over a sharp downturn in the Euro-zone. The September flash inflation rate rose sharply to 3.0%, from 2.5% previously.
The inflation data will make it very difficult for the ECB to justify a cut in interest rates in the near-term. The U.S personal income and Core PCE deflator were slightly weaker-than-expected, although the market impact was limited. There was a small increase in the revised consumer confidence index for September, while there was a stronger-than-expected Chicago PMI reading.
Today’s Exchange Rate Data
EU – Finance Minister’s Meeting (continues to Tuesday 4th)
U.K 00:01 – Hometrack House Prices (September)
EU 08:58 – Markit Manufacturing PMI (September)
U.K 09:28 – CIPS Manufacturing PMI (September)
U.S 15:00 – Construction Spending (August)
U.S 15:00 – ISM Manufacturing (September)