Exchange Rate News – The Pound declined against the Euro exchange rate

by Adam Solomon

Sterling / Euro and US Dollar

The Sterling exchange rate declined against the Euro early yesterday falling back towards 1.1470 in early trading, while the UK currency also lost ground versus the higher-yielding currencies, amid a revival in risk appetite. Asian stocks and commodities bounced back from the mid-week slump, but the Pound came under pressure, after an index of sales volumes at UK consumer-services companies plummeted to the lowest level since November 2009.

The report from the Confederation of British Industry will make it even more difficult for the Bank of England to raise interest rates at this stage of the fragile economic recovery because of the potential impact it would have on consumer confidence. Nonetheless, the Pound took advantage of broad Dollar weakness, rising up towards 1.6350, after a report in the U.S showed that the economy expanded just 1.8% year-on-year in the first quarter.

The revised estimate of U.S GDP fell short of initial expectations, reflecting the modest gain in consumer spending. The Dollar also lost ground versus the Euro and the downward move was exacerbated by the weekly labour market data, which showed that claims for unemployment benefits surged by 10,000 in the last week.

The Pound also bounced back against the Euro exchange rate, rising back through 1.15, despite comments from the ECB chairman Jean-Claude Trichet, who gave a strong indication that policy makers are focusing on inflation with the possible inclination to raise rates in July. The UK currency continued its upward surge against the Euro, peaking just above 1.16 and the highest level for eleven weeks.

An EU policy maker said that the International Monetary Fund may not grant Greece additional aid, which helped boost the appeal of the Pound and diversification away from the Euro. Jean-Claude Juncker, who leads the group EU finance ministers, said in a conference yesterday that “there are specific IMF rules and one of those rules says that IMF can only take action when the refinancing guarantee is given over 12-months.”

The Pound strengthened towards 1.6450 against the U.S Dollar exchange rate overnight, rising for the fourth consecutive day, amid reports that showed UK consumer confidence rose by the most in 18-years. The Gfk gauge of sentiment rose 10 points to minus 21 in May, the highest level in five months and probably reflects the increase in spending during the April Bank Holidays and Royal Wedding.

A separate report from the Nationwide Building Society showed that UK house prices increased by more-than-expected this month, rising 0.3%. The Pound also remained in the ascendancy versus a basket of currencies, including the Canadian Dollar, after breaking through strong resistance at 1.60 to trade at the highest level since March.

The positive tone of this morning’s data will add to the debate on when the Bank of England will begin raising interest rates. It is widely believed that policy makers will at least wait until the end of the year or the beginning of 2012 before increasing the benchmark lending rate. An increase now would jeopardise the already fragile economic recovery and risk another contraction.

BoE policy maker and staunch hawk Andrew Sentance will leave the panel on May 31st, reducing the number of officials that have voted for an immediate rate increase. The contrasting opinion within the MPC was perfectly illustrated yesterday. BoE member Tucker said he was concerned about inflation and his comments suggested that he may switch to a tightening bias at the June meeting. In contrast, Adam Posen warned that raising rates now would the wrong move given the tight fiscal policy.

Concerns surrounding the UK banking sector will remain a significant factor, after the Business Secretary Vince Cable warned that further shocks in the system are ahead. Weakness in other economies has helped curb selling pressure for Sterling, as the UK currency surged higher versus the U.S Dollar and the Euro.

Euro / US Dollar

The U.S Dollar declined against the Euro exchange rate yesterday, after the GDP data showed that the economy grew by less-than-expected in the first quarter. Elsewhere, jobless claims also increased to 424,000 in the latest weekly data, undermining the Dollar and raising concern that the labour market is struggling. The Euro initially pushed higher towards 1.42 on speculation of Chinese demand for European bonds, but the upward momentum was short-lived.

The structural vulnerabilities within the Euro-zone continue to hamper sentiment and the single currency fell sharply after Juncker’s comments later in the day. Given Greece’s short-term need to stave off the threat of default, such action by the EU would compound fears that the struggling nation would fail to meet its deficit reduction targets.

The European Central Bank has continued to warn over the consequences of restructuring Greece’s debt and the Euro fell sharply below 1.4080 towards the close of trading last night. Underlying support for both currencies remains week but the Dollar came under fresh selling pressure, after Asian stocks rallied again overnight, reducing the demand further for safe haven assets.

Today’s Data

U.K 07:00 – Nationwide House Prices (May)

EU 09:00 – M3 (April) – 3 Month Moving Average

EU 10:00 – Business Climate (May)

EU 10:00 – Economic Sentiment (May) – Industrial – Services – Consumer

U.S 13:30 – Personal Income (April) – Consumption – Core PCE

U.S 13:55 – Michigan Sentiment (May Final)

U.S 15:00 – Pending Home Sales (April)