by Adam Solomon
Sterling / Euro and US Dollar exchange rates
The Pound made gains for a second day against the U.S Dollar, encountering strong resistance in the region of 1.5680 yesterday, but retreated to lows in the region of 1.5550 by the close of trading. There was a gradual deterioration in risk appetite through the course of the day, as UK stocks declined for the first time in four days, after staging the biggest rally in 16 months.
Shares in Man Group Plc plummeted 25%, the most in three years, after the world’s largest hedge fund said assets under management will drop by 8.5%. Banking shares also retreated for the first time in three days with the benchmark FTSE 100 Index losing 1.4% on the day. The Financial Times reported yesterday that some Euro-zone nations are demanding private creditors take bigger writedowns on their Greek bond holdings.
The German Chancellor Angela Merkel is reportedly waiting for a report from the European Union, ECB and International Monetary Fund on Greece’s budget progress before deciding whether revisions are needed to the finance package that was agreed in July. All of which played its part in the deterioration of market sentiment and the lower yielding currencies like the Dollar and the Yen benefited the most.
High-yielding currencies like the Australian Dollar and South African Rand declined heavily during the Asian trading session last night, as investors sought security from renewed concerns about the global economy. More than $3.5 trillion was wiped off equity markets globally last week and barring the minor corrective recovery this week, sentiment will remain fragile.
The Pound edged weaker against the Euro yesterday but the decline may be short-lived on renewed concerns surrounding the European banking sector and the ongoing threat of a Greek default. The latest Bank of England survey reported some improvement in credit conditions during the third quarter, but there was still a high degree of uncertainty over the situation.
Further market speculation that the Bank of England would introduce further quantitative easing, potentially as early as next week’s meeting, had a negative impact on the Pound and the UK currency may decline further in the build-up to Thursday’s announcement. A report from the Nationwide Building Society showed that house prices were relatively unchanged in September and “downside risks” have increased.
The average cost of a home in the UK rose 0.1% from August to £166,256 and from a year earlier, prices were down 0.3%. The outlook for the property market has weakened as the sovereign debt crisis in the Euro-zone clouds the outlook for the economy and pushes up banks’ funding costs. UK mortgage approvals probably rose in August with the report this morning expected to show an increase of 49,700.
Euro / US Dollar exchange rates
The Euro made gains against 13 out of the 16 most actively traded currencies yesterday before German lawmakers vote on changes to a European bailout fund. The single currency rallied versus the Dollar, climbing to 1.3613, amid speculation that German Chancellor Angela Merkel will gather enough support among her coalition for today’s vote on the European Financial Stability Facility.
There was a sense of relief yesterday that the IMF would resume its negotiations over Greek fiscal policy today, with increased optimism that the next loan tranche would be approved. However, there is still a high degree of uncertainty over the situation, especially as there were reports that the German government was looking to re-negotiate the terms of the second Greece bailout package.
In the U.S, the durable goods orders data was marginally weaker-than-expected with a 0,1% decline for August, although the impact was limited as markets continued to concentrate on risk sentiment. There was a sharp decline in U.S stocks towards the close of trading, which undermined the Euro, as the Fed chairman Ben Bernanke said that the U.S is facing a crisis with a jobless rate at or above 9% since April 2009.
Today’s Exchange Rate Data
U.K 09:30 – Consumer Lend / Mortgage Apps (August)
EU 10:00 – EU Economic Sentiment Index (September) – Industrial / Consumer Confidence – Business Climate Index
U.S 13:30 – GDP Q2 – 2011 (Final Estimate)
U.S 13:30 – Weekly Jobless Claims (w/e 24th Sept)
U.S 15:00 – Pending Home Sales Index (August)