30 September 2009
The Pound rallied against the majors yesterday, after retail sales rose to the highest level in five months
GBPEUR/GBPUSD
The Pound rallied the most against the Euro since the beginning of June yesterday, while the UK currency also surged towards $1.60 versus the U.S Dollar, after an index of retail sales rose to the highest level in five months. A report from the Confederation of British Industry showed that retailers are more optimistic this month, than at any stage since April.
The index of orders placed on suppliers also rose to the highest level since February last year and the survey yesterday adds to recent evidence that the UK economy may be emerging from the worst recession since the Second World War. Seperate reports yesterday showed that the economy contracted less than previously estimated in the second quarter, while mortgage applications stayed close to the yearly high.
Andy Clarke, chairman of the Confederation of British Industry distributive trades panel, said that "after such a difficult summer, it's encouraging to see signs that conditions in the retail sector are stabilising. However, with unemployment rising, wage growth low and consumers building up their savings, spending is likely to remain subdued for some time."
The Pound also made gains versus the majority of the 16-most actively traded currencies, after reaching another 12-year low against the Australian Dollar earlier in the session. According to a report from the Office of National Statistics, gross domestic product shrank just 0.6% in the three months through June, compared with a prior estimate of 0.7%.
The report yesterday added to recent suggestions that the beleagured UK economy is finally emerging from the recession, after five consecutive quarters of contraction. The Chancellor of the Exchequer Alistair Darling said on Monday that the recovery may be gathering momentum by the end of the year, and supported the government's stimulus plan to purchase bonds.
UK gross domestic product slumped 2.5% in the first quarter, the most since 1958, and was revised lower from a 2.4% decline. The recession has now reduced GDP by 5.6%, while the widening UK debt position is also a grave concern for policy makers. The statistics office confirmed yesterday that the economy has contracted 5.5% from a year earlier, the most since records began in 1956.
The government have given assurances, as recently as last week, that current stimulus spending will be maintained until the recovery is secure. The Treasury plans to sell an extra £220 billion in debt this year and expects a deficit in 2010 of 12% of the economy. The Labour Party fell to third place in the polls for the first time since 1982 in an opinion poll published yesterday.
The Bank of England's chief economist Spencer Dale said last week that the economy has "turned a corner", the UK faces a "slow and protracted" recovery from the recession, as unemployment continues to rise. The number of people out of work and seeing employment rose in the three months through July to 2.47 million, the highest level since 1995.
Lena Konileva, an economist at Tullett Prebon in London, said yesterday that "the fiscal stimulus is likely to subside from the middle of next year and it leaves a lot of uncertainty about the sustainability of growth momentum. The Bank of England may look to counterbalance the draconian tightening that's in store from the next parliament."
The Confederation of British Industry also reported yesterday that the UK economy will expand 0.3% in the third quarter and 0.4% in the last three months of the year. The Bank of England will start raising interest rates from the current record low of 0.5% in the first half of 2010, despite recent estimates that the Pound will fall towards parity with the Euro in the first quarter.
Neil Mellor, a currency strategist at BNY Mellon Corp, said that "the Confederation of British Industry report has underpinned Sterling's leap. Retail sales were very good." Investors just needed a good reason to stop selling the Pound and sales report yesterday provided the perfect platform for Sterling to bounce back against the Euro and the Dollar.
Elsewhere, the Pound also received a boost yesterday, after a report from the Bank of England showed that mortgage approvals increased again in August, as banks granted 52,317 loans to buy homes, close to the highest level since April 2008. The report follows recent data from Hometrack Plc, which showed that prices rose to the highest level this year in August.
The UK currency declined last week against 14 out of the 16 most actively traded currencies, after the Governor of the Bank of England Mervyn King said that it's weakness was "very helpful" to the economic recovery. The Pound has fallen 2.9% against the Dollar since June 30th and a staggering 7% in value versus the Euro, after climbing 13% in the first half of the year.
Options trading showed yesterday that the odds of the Pound weakening to parity with the Euro by the end of March climbed to more than one in four, underlining growing speculation that the Bank of England favours a weaker currency. Therefore, why would investors encourage buying support for Sterling when it's own Central Bank wants to drive it lower.
The Bank of England met with economists in London yesterday to discuss the much discussed asset-purchase plan. Policy makers expressed concerns that investors are exaggerating the significance of King's comments last week that the Pound's decline has been good for UK exports. The Central Bank also said that it has no plans to change its deposit rate soon and that policy makers are satisfied with the effects of the program on boosting money supply.
EUR/USD
The Dollar rose to the highest level in two weeks versus the Euro yesterday, breaching the $1.46 level, after Russia said that it will maintain the share of U.S Treasuries in its international currency reserves, reducing concerns that central banks will diversify away from the U.S currency. The Dollar also stood firm even as consumer confidence unexpectedly fell in September, after unemployment increased.
The Conference Board's index of confidence dropped to a reading of 53.1, from a revised 54.5 in August. Unemployment is expected to rise to 10% this year, even as the pace of job losses slows and yesterday's report correlates with a recent statement from the Federal Reserve that tighter credit conditions are curbing household spending.
U.S stocks fluctuated between gains and losses, as a separate report showed that home values in 20 metropolitan areas fell less than forecast in the year ending in July. The Fed may be once of the last major central banks to raise interest rates, putting the recovery of the Dollar at risk, as foreign investors will be reluctant to invest more in the U.S.
Today's Economic Data 30th September
U.K 00:01 Gfk Consumer Sentiment (September)
GER 09:00 Unemployment (September)
EU 10:00 Flash HICP (September)
U.S 13:15 ADP Employment Report (September)
U.S 13:30 Final GDP (Q2)
U.S 14:45 Chicago PMI (September)
29 September 2009
The Pound plunges to a fresh six-month low versus the Euro
GBPEUR/GBPUSD
The Pound fell to the lowest level in six months against the Euro yesterday, dropping towards 1.0750 early in Europe, before a partial correction higher later in the day. The UK currency also dropped well below $1.60 versus the Dollar, consolidating its decline from last week, to the lowest level since July 8th at $1.5770.
The Pound is likely to test the next significant support level at 1.0526 versus the Euro over the coming weeks, amid speculation that the Bank of England is actively trying to weaken the currency, in order to help revive the UK economy. The Governor Mervyn King was quoted in the Newcastle Journal as saying that the Pound's weakness was "helpful".
According to the minutes released last week, Bank of England policy makers have said that there may be "false dawns" in the economic recovery and there is a growing concern over the financial position in the UK. Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi, said that "added to the negative Pound sentiment were the comments from King that the bank favours the weaker Pound, as a means to rebalance the economy."
The Pound has weakened to the lowest level since April 1st and may continue to decline based on a form of technical analysis known as the Fibonacci sequence of numbers. The Monetary Policy Committee was unanimous in their decision to leave its asset purchase program on hold at £175 billion, but the Pound would need to break above 1.1270 versus the Euro to change the trend towards the upside.
The Bank of England embarked on the controversial quantitative easing policy in March, in an effort to reduce borrowing costs and kick start the economy that has been ravaged by the worst recession since the Second World War. King, who was outvoted in August for a bigger increase in the plan, was quoted as saying that "the banking sector is not in good shape and it will take a long time before the balance sheets of the banks are fully repaired."
The minutes from the September policy meeting also showed that King changed his stance from the August announcement and elected for a no change in the plan. Lutz Karpowitz, a currency strategist at Commerzbank AG, said that "a currency which the country's own central bank likes to see weak obviously is not an attractive investment. If King keeps digging then he is clearly signaling that he does not care about this loss of trust."
At the G-20 meeting last week, finance ministers around the world signaled that the economic recovery may not be robust enough to justify the withdrawal of fiscal stimulus measures. The Federal Reserve said on September 23rd that it has pushed back the end date of its asset purchase program to March from December and kept the benchmark interest rate at a record low.
Bank of England policy maker Kate Barker said on the same day that that a hurried increase in borrowing costs could deter banks from lending and hamper the economic revival. According to analysts at BNP Paribas SA, the Pound may fall towards $1.54 by the end of the year, should the Bank of England maintain the current stance on the currency's decline.
Ian Stannard, a currency analyst at BNP Paribas SA, wrote in a report last week that "the Bank of England appears unconcerned by the currency weakness at this stage. We maintain our bearish sterling view, expecting the currency to be the weakest among the majors." Sterling has lost 7% in value against the Euro since mid June, after climbing 12% in the first half of the year.
BNP Paribas SA said last week that the Pound may reach parity with the Euro in the first quarter of 2010. Elsewhere, Citigroup Inc said on Friday that the UK currency may fall to the lowest level against the Norwegian Krone since 1977. In stark contrast, Goldman Sachs Group Inc said on September 22nd that investors should sell the Euro versus the Pound at 1.10.
In terms of economic data, the Pound failed to secure buying support yesterday, after UK house prices increased by the most in two years during September. Confidence in the UK property market improved and the average cost of a home in Britain rose 0.2% to £156,100. The increase is the biggest since June 2007 and has left house prices 5.6% lower than a year earlier.
The report adds to recent evidence that the property market may be starting to recover, after the credit crunch ended a decade long boom. There is still a risk that the recovery will falter, as unemployment continues to rise, while the fundamental lack of properties for sale on the market has also contributed to a rise in prices.
The Pound may find some support against the majors this morning with the final estimate of UK gross domestic product in the second quarter due for release. The report will probably confirm that growth remained unchanged from the preliminary estimate earlier in the year.
Elsewhere, UK mortgage application are expected to increase to 52,000 in August, indicating a return to growth in the third quarter. However, while the data appears to be in keeping with the theme of recovery, the Pound looks set to remain under pressure versus the Dollar and the Euro.
EUR/USD
The Dollar consolidated on recent gains made against the Euro on Monday, recording a high of $1.4597 in New York, despite the fundamental lack of U.S economic data to guide financial markets. The G-20 meetings towards the end of last week did not have a significant market impact on sentiment surrounding the currency marker.
The preliminary estimates of German consumer price inflation was slightly weaker-than-expected, with a 0.4% decline for September. The subdued prices data will maintain pressure for the ECB to maintain the current stimulus measures and that will undermine support for the Euro to some extent. Global risk appetite gradually improved through the course of the day with stocks rallying in Europe and the U.S, curbing further demand for the Dollar on defensive grounds.
The Euro was able to resist a further move lower, after the ECB President Jean-Claude Trichet stated that there was a gradual economic recovery, but that it was not yet time for an exit of the ultra loose monetary policies. Trichet was addressing the European Parliament and also said that it was very important to have a strong Dollar, which will reinforce speculation that officials are looking to contain the rate of losses on the U.S currency.
Today's Economic Data 29th September
U.K 09:30 Final GDP (Q2)
U.K 09:30 Mortgage Applications (August)
U.K 11:00 Confederation of British Industry Distributive Trades Balance (September)
EU 10:00 Business Climate (September)
EU 10:00 Economic Sentiment (September)
- Consumer/Industrial/Services
U.S 14:00 Case Shiller House Prices (July)
U.S 15:00 Consumer Confidence (September)
28 September 2009
The Pound may fall towards 1.0520 based on technical analysis
GBPEUR/GBPUSD
Following on from last week, the Pound declined heavily against the Euro, dropping to a low of 1.0880, the lowest level in more than five months, while the UK currency also dropped under $1.60 versus the U.S Dollar. A report on Thursday indicated that the Bank of England may be using the Pound's weakness as a way to boost the economy.
The Governor of the Central Bank Mervyn King also made a statement, following speculation that the Bank of England will cut the rate it pays financial institutions on deposits. King said that the weakening Pound was "helpful" to the process of rebalancing the economy. The Prime Minister Gordon Brown declined to comment on the Pound's decline, although he told reporters that he welcomes "all the factors that make for a stable economy".
The Pound has declined nearly 7% against the Euro since June and appears to have been driven lower by the tone and language used in a number of statements from Bank of England policy makers. King also said in an interview yesterday that two British banks got within hours of a liquidity shortfall on October 6th 2008, the day the financial system came to the brink of meltdown.
Lutz Karpowitz, a currency analyst at Commerzbank, wrote in a report yesterday that "a currency, (the Pound) which the country's own central bank like to see weak, obviously is not an attractive investment. If King keeps digging then he is clearly signaling that he does not care about this loss of trust."
The Pound fell 1.5% against the Euro on Thursday, the weakest level since April 3rd, and is likely to fall even further, after breaking through long-term trend support at 1.1270 earlier this month. The UK currency also fell after the Daily Telegraph reported that two policy makers called economists to a "crisis meeting" this week to discuss the Pound's decline and the Bank's quantitative easing policy.
Jeremy Stretch, a senior currency strategist at Rabobank International, said that "the press reports regarding the economists' meeting next week could be indicating that issues such as the deposit rate cut are back on the table. The market is putting two and two together and seeing the plumbing or the pipes of the UK financial system are still a little gummed up."
King told the UK Treasury select committee earlier this month that policy makers were considering cutting the rate paid to financial institutions on deposits, which is currently at 0.5%. The Bank of England may still loosen its policy stance further and begin with withdrawing excess liquidity from the UK financial system in the third quarter of 2010.
Elsewhere, the Pound also lost ground against the Dollar and plummeted to a fresh 12-year low versus the Australian Dollar, after UK stocks declined on the week. Reports in the U.S showed that existing home sales unexpectedly fell in August, while the Federal Reserve said that it will cut the size of two programs designed to bolster credit markets.
According to the latest estimates from Commerzbank AG, the Pound may weaken to 1.0630 versus the Euro by the end of the year, after King's comments increased speculation that the Bank of England is actively trying to weaken the Pound. The UK currency may fall further this week, especially if global stocks continue to fall, with a move towards 1.0526 versus the Euro a possibility.
The minutes from the Bank's last policy meeting were also released last week, where policy makers voted unanimously to keep bond purchases on hold in September. In a dramatic u-turn, the governor of the Bank of England Mervyn King agreed to support the majority of the MPC, despite his recommendation for a more aggressive increase in August. King and David Miles both switched sides and joined the unanimous vote for no change in the plan, arguing that cohesion was better for the time being, even though a higher amount may be warranted.
King and Miles has sought as much as £200 billion at the August decision but all nine policy makers opted to keep the benchmark interest rate unchanged at a record low of 0.5%. The Confederation of British Industry have raised its forecast for economic growth in the third quarter and predicted that the Central Bank may cap its program at the current level, after buying the allocation of newly created money.
The language used in the minutes, however, did suggest that a further extension in the asset purchase program may be justified in the future. Policy makers adjudged that "in the absence of significant news about the medium term, the case for adjusting the program now was outweighed by the benefits of following through with the program."
The Pound also fell on Friday, as world leaders at the G-20 meeting united behind a plan to regulate banker pay and tighten capital regulations for financial institutions. The UK currency dropped below $1.60 for the first time since July 8th, after U.S officials said Group of 20 leaders are closer to a "broad agreement" on a plan to tie compensation more closely to risk.
The UK currency dropped by the most since April against the Dollar on Thursday, following comments from the Bank of England that the Pound's depreciation is 'helpful'. Steven Barrow, head of G-10 currency research at Standard Bank Plc, said that "sentiment is pretty poor for Sterling. It comes down to what King was saying, at the G-20, there are issues of bonuses and bank capital."
The Pound also declined after reports in the U.S on Friday showed that durable goods orders unexpectedly fell in August, signaling that companies are curbing spending and the economic recovery may falter. In terms of economic data, the focus this week will fall on September's manufacturing index, while mortgage approvals and house prices are expected to show further signs of improvement.
EUR/USD
The Dollar advanced against the Euro last week, after an unexpected drop in U.S existing home sales reduced demand for higher-yielding assets, as investors maintained a mood of caution, following the FOMC announcement. Purchases dropped 2.7% to a 5.1 million annual rate, the second highest level in the last 23-months.
The Dollar gained 0.2% against the Euro on Thursday, rallying to a high of $1.4713, and the U.S currency may continue to strengthen in the near-time, as global stocks decline, after the Fed said that it will extend the end date of its $1.45 trillion purchases of mortgage backed securities to March from December.
The Euro was largely susceptible to risk sentiment and failed to secure buying support, even after German business confidence rose to a 12-month high in September. The Ifo index indicated that Europe's largest economy will gather momentum over the coming months, after suffering the worst recession since the Second World War.
The Euro may fall to a two week low against the Dollar by the end of this week, as the single currency looks poised for a sustained downtrend, after having risen to $1.4844 last week. Fibonacci analysis, based on the theory that prices will rise and fall by certain percentages after reaching a high or a low, suggests that the Euro may drop towards $1.4500.
Today's Economic Data 28th September
U.K 11:00 Land Registry House Prices (August)
25 September 2009
The Pound falls to the lowest level in five months versus the Euro
The Pound declined heavily against the Euro yesterday, dropping to a low of 1.0940, the lowest level in more than five months, while the UK currency also dropped towards $1.60 versus the U.S Dollar. A report indicated that the Bank of England may be using the Pound's weakness as a way to boost the economy.
The Governor of the Central Bank Mervyn King also made a statement, following speculation that the Bank of England will cut the rate it pays financial institutions on deposits. King said that the weakening Pound was "helpful" to the process of rebalancing the economy. The Prime Minister Gordon Brown declined to comment on the Pound's decline, although he told reporters that he welcomes "all the factors that make for a stable economy".
The Pound has declined nearly 7% against the Euro since June and appears to have been driven lower by the tone and language used in a number of statements from Bank of England policy makers. King also said in an interview yesterday that two British banks got within hours of a liquidity shortfall on October 6th 2008, the day the financial system came to the brink of meltdown. In a broadcast with the BBC, King said that "two of our major banks which had had difficulty in obtaining funding could raise money for one week then only for one day, and then on that Monday and Tuesday it was not possible even for those two banks really to be confident they could get to the end of the day."
King would have been referring to Royal Bank of Scotland Plc and HBOS Plc, who were both taken under government control. The Prime Minister pledged to invest about £50 billion into the banking system on October 8th last year, to save it from collapse in the aftermath of Lehman Brothers Holdings Inc's bankruptcy in September. Lutz Karpowitz, a currency analyst at Commerzbank, wrote in a report yesterday that "a currency, (the Pound) which the country's own central bank like to see weak, obviously is not an attractive investment. If King keeps digging then he is clearly signaling that he does not care about this loss of trust."
The Pound fell 1.5% against the Euro yesterday, the weakest level since April 3rd, and is likely to fall further, after breaking through long-term trend support at 1.1270 earlier this month. The UK currency also fell after the Daily Telegraph reported that two policy makers called economists to a "crisis meeting" next week to discuss the Pound's decline and the Bank's quantitative easing policy. Jeremy Stretch, a senior currency strategist at Rabobank International, said that "the press reports regarding the economists' meeting next week could be indicating that issues such as the deposit rate cut are back on the table.
The market is putting two and two together and seeing the plumbing or the pipes of the UK financial system are still a little gummed up." King told the UK Treasury select committee last week that policy makers were considering cutting the rate paid to financial institutions on deposits, which is currently at 0.5%. The Bank of England may still loosen its policy stance further and begin with withdrawing excess liquidity from the UK financial system in the third quarter of 2010. Brian Kim, a currency strategist at UBS AG, said yesterday that "our economists continue to expect a £25 billion increase as part of a phased easing in the quantitative easing program.
The committee in our view believes the risks to policy makers are very much asymmetric and will therefore remain in a 'give-growth-a-chance' mode." Elsewhere, the Pound also lost ground against the Dollar and plummeted to a fresh 12-year low versus the Australian Dollar, after UK stocks declined for a second successive day in London. Reports in the U.S showed that existing home sales unexpectedly fell in August, while the Federal Reserve said that it will cut the size of two programs designed to bolster credit markets. According to the latest estimates from Commerzbank AG, the Pound may weaken to 1.0630 versus the Euro by the end of the year, after King's comments increased speculation that the Bank of England is actively trying to weaken the Pound.
The UK currency may fall further today, especially if global stocks continue to fall, with a breach below $1.60 versus the Dollar a possibility. EUR/USD The Dollar advanced against the Euro yesterday for the second day in succession, after an unexpected drop in U.S existing home sales reduced demand for higher-yielding assets, as investors maintained a mood of caution. Purchases dropped 2.7% to a 5.1 million annual rate, the second highest level in the last 23-months. The rising unemployment rate means that more Americans may lose their homes, swelling the amount of unsold properties saturating the market. Nevertheless, the housing recession that crippled the economy is easing, as foreclosure-driven price declines, tax credits and near record low borrowing costs have helped stabilise demand over recent months.
The Dollar gained a further 0.2% against the Euro in New York, rallying to a high of $1.4713, and the U.S currency may continue to strengthen in the near-time, as global stocks decline following the FOMC announcement on Tuesday. The Fed said that it will extend the end date of its $1.45 trillion purchases of mortgage backed securities to March from December. The Euro was largely susceptible to risk sentiment and failed to secure buying support, even after German business confidence rose to a 12-month high in September. The Ifo index indicated that Europe's largest economy will gather momentum over the coming months, after suffering the worst recession since the Second World War.
Today's Economic Data 25th September
EU 09:00 M3 (August) - 3 Month Moving Average
U.S 13:30 Durable Goods (August)
U.S 14:55 Michigan Sentiment (Sept - Final)
U.S 15:00 New Home Sales (August)
24 September 2009
The Pound declines against the majors following the FOMC rate announcement
GBPEUR/GBPUSD
The Pound rallied against the Euro yesterday, rising to a high of 1.1128, after reaching the lowest level in five months on Tuesday. The UK currency also made gains versus a basket of currencies, including the U.S Dollar, after the minutes from the Bank of England's last policy-setting meeting showed that policy makers voted unanimously not to increase the bond-purchasing plan from £175 billion.
In a dramatic u-turn, the governor of the Bank of England Mervyn King agreed this month to support the majority of the MPC, despite his recommendation for a more aggressive increase in August. King and David Miles both switched sides and joined the unanimous vote for no change in the plan, arguing that cohesion was better for the time being, even though a higher amount may be warranted.
King and Miles has sought as much as £200 billion at the August decision but all nine policy makers opted to keep the benchmark interest rate unchanged at a record low of 0.5%. The Confederation of British Industry yesterday raised its forecast for economic growth in the third quarter and predicted that the Central Bank may cap its program at the current level, after buying the allocation of newly created money.
Colin Ellis, an economist at Daiwa Securities, said yesterday that "we probably have seen the worst of the recession. A further extension of asset purchases could be on the card, but it's difficult balancing act for the bank." The Pound subsequently rose as much as 0.8% against the Dollar and 0.6% versus the Euro, as the unanimous verdict was a surprise to investors, who had anticipated a split decision.
The language used in the minutes, however, did suggest that a further extension in the asset purchase program may be justified in the future. Policy makers adjudged that "in the absence of significant news about the medium term, the case for adjusting the program now was outweighed by the benefits of following through with the program."
Policy makers highlighted that prices of assets such as housing and equities had risen, and the short-term risk to the economy had lessened to some extent. The British Bankers' Association have stated that the slump in property prices seems to be abating and said yesterday that mortgage approvals held close to the highest level in a year last month.
The Bank of England has bought almost £150 billion in assets so far this year and plans to complete the current program by November. The tone of the minutes appears to be slightly more optimistic than in recent months and the Pound made gains, amid speculation that policy makers won't extend beyond the allocated amount of £175 billion in November.
UK gross domestic product will rise 0.3% in the third quarter, reversing a June prediction of the same size and the Confederation of British Industry expects the economy to expand 0.4% in the final three month of the year. The Bank of England are expected to stop purchasing bonds and may even begin raising interest rates in the first half of 2010.
Peter Chatwell, a fixed income strategist at Calyon, said yesterday that "the monetary policy committee was not quite as dovish as we might have feared. There's been a strong sell-off on gilts and yields have been strong across the curve. The Pound has rallied not just on the interest rate, but also on less stimulus implied."
The FTSE 100 Index climbed 0.3%, as Aviva Plc and Prudential Plc gained, after Cazenove recommended shares of life insurers. The increase in risk appetite also supported the Pound but the UK currency would need to break above 1.1270 versus the Euro to turn the trend, with many economists still talking about the possibility of parity.
The Pound weakened sharply against the majority of the 16-most actively traded currencies following the FOMC rate announcement. The UK currency dipped towards the support at 1.10 versus the Euro and 1.6250 against the U.S Dollar, as investors flocked to the relative security of lower yielding currencies.
EUR/USD
The Dollar advanced from the lowest level in a year against the Euro yesterday, as traders prepared for the FOMC rate announcement last night. European manufacturing and service industries expanded for a second successive month in the Flash estimate for September, suggesting that the Euro-zone economy is gathering momentum.
A composite index of both industries rose above a level to indicate expansion, after remaining in recession for 14-straight months. The economy is showing signs of emerging from its worst recession in more than 60-years, after governments worldwide stepped up fiscal stimulus measures and the ECB injected billions of Euros into the market.
European economic confidence has risen to the highest level in 10-months, but ECB governing council member Guy Quaden said last week that rising unemployment is a reason to remain "prudent" over the economic outlook. Europe's jobless rate rose to 9.5% in July, the highest level since 1999, as some of the region's largest companies are forced to eliminate their workforce.
The Federal Reserve held interest rates in a range between zero and 0.2% last night and the accompanying statement said that the economy is liable to remain weak over the coming months. In this context, the Fed expects interest rates to remain at ultra low levels for an extended period, dampening speculation of any near-term increase.
The total amount of quantitative easing was also left on hold, but the period will be extended to the end of the first quarter so the rate of bond purchases will slow. There was a reduction in short positions after the announcement, whole risk appetite also dipped and supported the Dollar. The cautious Fed stance will limit Dollar support on yield grounds but the U.S currency is benefiting from an increase in risk aversion.
Today's Economic Data 24th September
U.S G-20 Summit Begins (to Friday 25th)
GER 09:00 Ifo Index (September)
U.S 13:30 Initial Jobless Claims (w/e 19th Sept)
U.S 15:00 Existing Home Sales (August)
23 September 2009
The Pound rallies against the Dollar, as stocks resume the upward trend
GBPEUR/GBPUSD
The Pound traded close to the lowest level in six months against the Euro yesterday, while the UK currency also remained subdued versus a basket of currencies amid a fundamental lack of market indicators. Sterling slumped to a fresh 12-month low against the Australian Dollar, on concerns that the widening budget deficit will curtail demand for UK assets.
The Pound declined earlier in the day and fell towards 1.10 versus the Euro, as the Prime Minister Gordon Brown said that the global economy has yet to feel the biggest impact of government spending programs. Numerous stimulus measures put into practice by Brown's government between 2008 and 2010 have totalled 3% of UK gross domestic product.
Ian Stannard, a currency strategist at BNP Paribas SA, said yesterday that "the UK has got one of the worst fiscal positions in Europe. Sterling is coming back under pressure. It's going to struggle to participate in any rebound in the pro-cyclical currencies. Investors will be looking elsewhere."
The lack of economic Today's Economic Data yesterday saw the Pound treading water just above the key support at 1.10 versus the Euro. The UK currency did manage to register some modest gains versus the U.S Dollar, after UK stocks rose, resuming a six month rally for the FTSE 100 Index. Rio Tinto, the world's third largest mining company, led the rally in mining shares, while gold and copper also rallied.
The benchmark FTSE 100 gained 0.4% to 5,156.01 in London, climbing for the 11th time in 13 days. Philip Gillet, a sales trader at IG Index, said that "today's recovery shows that sentiment still looks to be positive amongst investors. As has so often been the case over recent months, it is a mining-led rally."
The FTSE 100 Index has now rebounded 47% since the March 3rd low, as companies worldwide reported earnings that beat estimates, while economic releases added to evidence that the worst of the recession may be over. However, the Pound has declined against all of the 16-most actively traded currencies, amid speculation that the UK is further from a recovery.
The Pound touched a low of 1.1016 versus the Euro yesterday, after reaching the weakest level since April 9th earlier in the session. The UK currency was actually up 0.7% against the U.S Dollar, trading at a high of $1.6380. The Pound has lost 6% in value against the Euro since June, after climbing 12% in the first half of the year.
According to Ian Stannard, the Pound may weaken to parity with the Euro "towards the end of the year" as Britain's budget deficit is expected to exceed 12% of gross domestic product in 2010, the most amongst the G-20 Group of Nations. The Bank of England said on Monday that "the long-run of sustainable real exchange rate" for sterling may have fallen during the financial turmoil.
Elsewhere, analysts at Goldman Sachs Group Inc wrote in a report yesterday that investors should sell the Euro against the Pound with a target of 1.1905, predicting "a relative tightening in financial conditions in the UK versus the Euro-zone. The Pound's declines against the Dollar may begin to subside according to the latest technical indicators.
One measure of technical analysis shows that the Pound moved away from a so-called oversold position against the Dollar on Monday. Bollinger Bands, which signals when prices may change direction based on a security's volatility and moving average, indicated that the Pound fell close to so-called support levels between 1.6250-1.6250.
In addition, the Directional Movement Indicator shows the strength of Sterling's so-called downtrend may be weakening. The Pound has dropped 2% against the Dollar since September 11th, falling for five out of seven days, after the Bank of England governor Mervyn King said that policy makers are considering lowering the deposit rate.
Investors are eagerly awaiting the release of the minutes from the Bank of England's last policy meeting this morning to gauge whether the nine-strong MPC voted unanimously to hold quantitative easing at £175 billion. At least three policy makers, including the governor Mervyn King, voted for a more aggressive increase in August and a split decision tomorrow would tend to undermine the Pound.
EUR/USD
The Dollar relinquished earlier gains made against the Euro yesterday and weakened for the first time in three days, to the lowest level this year, amid mounting evidence that the global economy is recovering. The revival in risk appetite weighed heavily on the Dollar, as the U.S Currency dropped declined by the most versus the New Zealand and Australian Dollar.
Thanos Papasavvas, head of currency management at Investec Asset Management Ltd, said yesterday that "in terms of economic recovery, capital will move away from the U.S to those regions which offer better opportunities. The Dollar was the safe haven of 2008, and a lot of the reversal we're seeing means money can't be put back to work."
The Dollar slumped 0.8% to a low of $1.4804 against the Euro in New York, from $1.4680 on Monday, the weakest level since September 23rd 2008. The Dollar also weakened on speculation that the Group of 20 Leaders meeting on September 24th will see calls for a reduction in global trade imbalances, which may cause further gains in currencies against the Dollar.
Today's Economic Data 23rd September
EU 08:50 Flash PMI - Composite (September)
- Manufacturing
- Services
U.K 09:30 Bank of England Monetary Policy Committee Minutes (9th / 10th Sept Meeting)
EU 10:00 Industrial Orders (July)
U.S 19:15
22 September 2009
The Pound slumps against the majors, after UK stocks retreat for the first time in seven days
GBPEUR/GBPUSD
The Pound slumped for a third straight day against the Dollar yesterday, while the UK currency also touched a fresh five-month low versus the Euro, after UK stocks fell for the first time in seven days. The benchmark FTSE 100 Index retraced 0.8% in London, trimming some of last week's 3.2% advance, led by a sell-off in commodity producers and banking shares.
The Royal Bank of Scotland Group Plc also lost 6%, after two people familiar with the talks said that the lender is in discussions to gauge the appetite for a potential rights offer. The FTSE 100 has rallied 46% since March, as companies reported earnings that beat analysts' estimates and economic data indicated that the worst of the recession may be past.
The correlation between Sterling sentiment and the performance of the stock market has been increasingly prevalent this year. However, the Pound has failed to find any buying support as global stock markets rallied over the last week, but the first fall in seven days has prompted a further decline in Sterling, indicating that risk sentiment is still an important factor in the market.
The Pound also weakened towards 1.10 versus the Euro yesterday, after Standard Bank Plc cuts its forecast for the UK currency. The Bank of England said that "the long-run sustainable real exchange rate" for Sterling may have fallen during the ongoing financial crisis. The FTSE 350 Banks Index subsequently dropped as much as 2.2%.
Steven Barrow, head of Group of 10 currency research at Standard Bank, said that "the market isn't enamored with Sterling. The Bank of England is giving a good reason for this to be the case." He also said that the struggling Pound will reach 1.05 versus the Euro over the next months and $1.63 against the U.S Dollar.
The Bank of England released its quarterly bulletin yesterday and said that the financial crisis began to narrow the trade gap between nations with trade deficits and surplus countries such as China by lowering domestic demand. That prompted the depreciation in the UK currency and the U.S Dollar, a trend that may continue over the next year.
The Pound has fallen 5.9% against the Euro since the beginning of August and 2.9% versus the Dollar, as investors speculated that the Central Bank will have to increase the so called quantitative easing program to revive lending conditions. The Pound declined yesterday even as Rightmove Plc said that UK home sellers raised asking prices in September.
Renewed confidence in the property market and the dwindling supply of homes have seen house prices rise 0.6% on the month to £223,996, after falling 2.2% in August. The property market is showing some tentative signs of real recovery, despite the fundamental lack of homes for sale. The Bank of England this month kept the benchmark interest rate on hold at 0.5% and maintained a policy to encourage lending.
There are some signs that banks are becoming more willing to lend money and that demand for home loans is increasing, as mortgage approvals rose to the highest level this year in August. However, unemployment is at the highest level since 1995 and the governor of the Bank of England Mervyn King said that job losses will keep rising well into 2010.
EUR/USD
The Dollar strengthened 0.2% against the Euro yesterday, as the U.S currency advanced against most of the 16-most actively traded currencies, ahead of this week's Federal Reserve meeting. A report yesterday showed that an index of U.S leading economic indicators gained in August for a fifth successive month.
The Fed are expected to keep its target rate for overnight loans at range between zero and 0.25% on Wednesday and the Chairman Ben Bernanke and his colleagues may discuss winding down purchases of mortgage-backed securities, as part of its easing policy. Henrik Gullberg, a currency strategist at Deutsche Bank AG, said yesterday that "investors are keen to see to what extent the Fed will acknowledge the improvement in the recent economic data, and the market might be positioning for that."
There is a strong possibility that economic fears will increase once more, which will limit any buying support for the Dollar on yield grounds, but investors are unlikely to sell the U.S currency prior to the announcement. Underlying sentiment is still weak, which will limit the scope for Dollar gains and, from highs around $1.4610, the U.S currency weakened back towards $1.4680.
Today's Economic Data 22nd September
No Today's Economic Data
21 September 2009
The Pound may fall towards parity versus the Euro
Following on from last week, the Pound plummeted to a four month low against the Euro on Friday and to the lowest level in 12-years versus the Australian Dollar. The UK currency also held close to the lowest level in a week against the U.S Dollar and declined to yearly lows versus a basket of currencies, amid a host of negative economic data and derisorary comments from Bank of England.
The number of jobless claims in the three months though July rose by 210,000 to 2.47 million, denting recent optimism that an economic recovery is gaining momentum. The worst recession in a generation has ravaged the UK labour market, as a separate measure showed claims for unemployment benefits climbed by 24,400 in August to 1.61 million.
The Bank of England Governor Mervyn King said last week in his quarterly inflation report that households will feel the pain from the recession, even after the economy has stopped shrinking "because unemployment is either going to keep rising or remain high." Policy makers are printing as much as £175 billion in newly created money to aid an economic recovery and ward off the threat of deflation.
Philip Shaw, an economist at Investec Securities, said yesterday that "if anything the UK economy is only just emerging from recession, and this is a lagging indicator. We're looking at unemployment peaking towards the middle of next year. Things are likely to improve at a slow rate, but it's likely to remain uncomfortable for a long time."
The Prime Minister Gordon Brown also said that the recovery "is still fragile" and that current fiscal stimulus measures needed to be maintained. Unemployment still remains the biggest concern for families and the rising jobless rate will undoubtedly have an impact on consumer spending over the coming months.
King told the Treasury Select Committee on Tuesday that the Bank of England is "looking at" cutting the deposit rate to stimulate lending by financial institutions and revive consumer confidence. Banks are currently paid 0.5% on the deposits, and the Central Bank is boosting reserves through asset purchases under its so called quantitative easing policy, King doesn't want them to grow too much.
The Pound has lost 4.2% against the Euro since June, after climbing 12% in the first half of the year, amid concerns that the aggressive fiscal stimulus package isn't working fast enough to drag the economy out of a recession. The UK currency was little changed against the Dollar in the second half but may strengthen to $1.7050 in the "medium term", according to a recent estimate from Commerzbank AG.
Karen Jones. a technical analyst, said last week that "Pound-Dollar has sold off to its 50% retracement of the recent leg higher. The move lower is regarded as corrective as we look for dips to be contained by the $1.6320-$1.6250 band for an upside bias to be maintained. Given the recent weakness of the U.S Dollar, the risk has increased for the upmove to then reassert."
The Pound continued the pace of the decline towards the end of the week, despite reports that UK manufacturing orders rose to the highest level in eight months. The positive tone of the report added to suggestions that the Pound's 1.9% decline against the Euro this week was excessive. The Pound has slumped under the significant support level at 1.1270 and is therefore more likely to decline towards 1.10 in the short-term.
Elsewhere, a separate report from the recruitment firm Morgan McKinley showed that job openings in London's financial industry climbed 18% in August, the biggest gain of the year so far. However, a report from the Office of National Statistics showed that UK retail sales unexpectedly stalled in August, a sign that consumers are reining in spending, as unemployment spirals.
Sales were virtually unchanged from July, when they climbed 0.2%, which was ahead of preliminary estimates but suggests that confidence remains subdued. Sales also climbed 2.1% from this stage last year, as the Bank of England Governor Mervyn King said this week that households will keep feeling the pain from the recession.
A separate report from BNP Paribas SA indicated that the Pound may sink towards parity versus the Euro and reach the highest level in more than a year versus the Dollar, as investors favour the lucrative return of higher-yielding assets. The Bank of England and the Federal Reserve are flooding the financial system with newly created cash to keep borrowing costs at ultra low levels, in anticipation of a slow and protracted recovery.
Hans-Guenter Redeker, global head of currency strategy at BNP Paribas, said that "sterling is likely to be the weakest currency in town followed by the U.S Dollar. The U.S Dollar has been used as a funding and a reserve currency simultaneously, suggesting the U.S Dollar will depreciate less than Sterling."
The Pound plunged under 1.11 against the Euro on Friday for the first time in four months and may encounter some near-term support around 1.1000 before a further move lower, depending this week's market sentiment. The UK currency also fell into a range of support between $1.6250 and 1.6350 versus the Dollar, amid concerns that UK banks need to do more to replenish their balance sheets of toxic debt.
The Pound also tumbled to a fresh 12-year low against the Australian Dollar, after Lloyds Banking Group Plc said that it may pull out of the government's asset-insurance program. The Financial Times reported earlier on Friday that the bank's capital position was too week to do so and two year government bonds subsequently rallied for the first time in three days.
Ian Stannard, a currency strategist at BNP Paribas SA, said on Friday that "they've highlighted some of the problems in the UK banking system. Rates are going to remain low in the UK for some time, so that's going to weigh on Sterling. The Pound is going to come under significant pressure"
The Pound also stayed lower after the UK budget deficit expanded to a record level for August, as the recession destroyed taxes and jobless benefits soared. The shortfall expanded to £16.1 billion, compared with £9.9 billion this time last year. The Pound lost 0.4% in value against the Euro and may edge towards parity over the coming quarter.
EUR/USD
The Dollar declined to the lowest level against the Euro in almost a year last week, as an increase in U.S industrial production encouraged investors to sell the Dollar in favour of higher-yielding assets. The Euro-zone inflation was also slightly higher-than-expected and confirmed a headline rate of -0.2% for August, confirming that the ECB will hold monetary policy steady in the short-term.
The U.S industrial output data was better-than-anticipated with a 0.8% increase for August, following an upwardly revised 1% increase the previous month. Consumer prices rose 0.4%, which was also slightly higher than forecast and followed recent comments from a number of Fed officials that indicated a return to conventional policy techniques may be forthcoming.
The Dollar rallied from the weakest level in a year versus the Euro on Friday, amid concerns that the global financial system remains weak, which led investors to reduce holdings of higher-yielding assets. The U.S currency rose for the first time this week and from a technical perspective, the Dollar could be poised to make further gains.
Today's Economic Data 21st September
U.K 00:01 Rightmove House Prices (September)
U.S 15:00 Leading Indicators (August)
18 September 2009
The Pound declines to a fresh four month low versus the Euro
GBPEUR/GBPUSD
The Pound rallied against the Dollar yesterday, rising above $1.65 in London, while the UK currency also remained largely unchanged versus the Euro, after UK manufacturing orders rose to the highest level in eight months. The gauge of factory orders rose to a reading of minus 48 in September, the highest level since January.
The positive tone of the report added to suggestions that the Pound's 1.9% decline against the Euro this week was excessive. The UK currency rebounded from the lowest level in four months versus the Euro but the recovery is unlikely to gather momentum. The Pound is slumped under the significant support level at 1.1270 and is therefore more likely to decline towards 1.10 in the short-term.
Elsewhere, a separate report from the recruitment firm Morgan McKinley showed that job openings in London's financial industry climbed 18% in August, the biggest gain of the year so far. However, a report from the Office of National Statistics showed that UK retail sales unexpectedly stalled in August, a sign that consumers are reining in spending, as unemployment spirals.
Sales were virtually unchanged from July, when they climbed 0.2%, which was ahead of preliminary estimates but suggests that confidence remains subdued. Sales also climbed 2.1% from this stage last year, as the Bank of England Governor Mervyn King said this week that households will keep feeling the pain from the recession.
The tentative signs of a "highly uncertain" recovery means that consumers are left trying to pay off a record debt of £1.5 trillion, as unemployment, currently at a the highest level in 14-years, continues to rise. Alan Clarke, an economist at BNP Paribas SA, said yesterday that "consumer spending has been fairly resilient, but with growth below its potential unemployment will continue to rise and that will hold back consumer spending. There's a chance the Bank will increase the bond purchase program further, and there won't be any rate increases until at least 2011."
Retail sales have stalled after two consecutive months of increases and the gain in July was revised lower by half from 0.4%. The number of people out of work and seeking employment reached 2.5 million in the three months through July, the highest amount since 1995. Policy makers confirmed this month their plan to buy £175 billion of bonds with newly created money to stoke spending and ensure the end of the recession.
The Pound staged a modest recovery in the aftermath of the economic Today's Economic Data yesterday, while UK stocks also rallied for a fifth straight day. Gerry Celaya, chief strategist at Redtower Research, said that "the Pound fell a bit far, we're looking for Sterling to come back up". The benchmark FTSE 100 Index climbed 0.3% in London and headed for the highest close in a year, amid speculation that the outlook for earnings is improving.
A separate report from BNP Paribas SA yesterday indicated that the Pound may sink towards parity versus the Euro and reach the highest level in more than a year versus the Dollar, as investors favour the lucrative return of higher-yielding assets. The Bank of England and the Federal Reserve are flooding the financial system with newly created cash to keep borrowing costs at ultra low levels, in anticipation of a slow recovery.
Hans-Guenter Redeker, global head of currency strategy at BNP Paribas, said that "sterling is likely to be the weakest currency in town followed by the U.S Dollar. The U.S Dollar has been used as a funding and a reserve currency simultaneously, suggesting the U.S Dollar will depreciate less than Sterling."
EUR/USD
The Dollar dropped to within a whisker of the lowest level in a year versus the Euro yesterday, after reports in the U.S showed that manufacturing in the Philadelphia region expanded by more than forecast. The Philly Fed economic index jumped to a reading of 14.1 this month, from just 4.2 in August, as sales advanced at the fastest pace since the recession began.
Improving sales combined with a record decline in inventories means that companies are likely to increase orders, giving factories more scope to maintain the expansion over the coming months. Manufacturing and housing, two industries that led the economy into the worst recession since the Great Depression, are now a fundamental part of the emerging recovery.
Overall Dollar sentiment remain very weak, but there is some potential for buying support on valuation grounds, while it will be difficult to extend the improved mood of risk appetite any further and that may offer a degree of protection for the U.S currency. The Euro was holding above $1.47 against the Dollar this morning but may struggle to maintain that momentum, ahead of the current account data later today.
Today's Economic Data 18th September
U.K 09:30 PS Net Borrowing (August)
EU 09:00 Current Account (July)
17 September 2009
The Dollar slumps to the lowest level this year against the Euro, as risk appetite continues to strengthen
GBPEUR/GBPUSD
The Pound plummeted to a four month low against the Euro yesterday and to the lowest level in 12-years versus the Australian Dollar. The UK currency also held close to the lowest level in a week against the U.S Dollar and declined to yearly lows versus a basket of currencies, after UK unemployment rose to the highest level since 1995.
The number of jobless claims in the three months through July rose by 210,000 to 2.47 million, denting recent optimism that an economic recovery is gaining momentum. The worst recession in a generation has ravaged the UK labour market, as a separate measure showing claims for unemployment benefits climbed by 24,400 in August to 1.61 million.
The Bank of England Governor Mervyn King said yesterday in his quarterly inflation report that households will feel the pain from the recession, even after the economy has stopped shrinking "because unemployment is either going to keep rising or remain high." Policy makers are printing as much as £175 billion in newly created money to aid an economic recovery and ward off the threat of deflation.
Philip Shaw, an economist at Investec Securities, said yesterday that "if anything the UK economy is only just emerging from recession, and this is a lagging indicator. We're looking at unemployment peaking towards the middle of next year. Things are likely to improve at a slow rate, but it's likely to remain uncomfortable for a long time."
The Prime Minister Gordon Brown also said yesterday that the recovery "is still fragile" and that current fiscal stimulus measures needed to be maintained. Unemployment still remains the biggest concern for families and the rising jobless rate will undoubtedly have an impact on consumer spending over the coming months.
The unemployment rate in the three months through July rose to 7.9%, the most since 1996, and that compares to the latest figures of 9.5% in the Euro-zone and 9.7% in the U.S. However, the broader economy has shown some signs of coming out of the slump, as services expanded at the fastest pace in almost two years in August.
David Kern, the chief economist at the British Chamber of Commerce, said yesterday that "although the increase in unemployment was marginally smaller than feared, employment continues to fall. Without an increase in the number of people deemed 'economically inactive', the increase in unemployment would have been much larger."
Companies may have also limited the pace of job cuts by curbing pay increases instead, as average hourly earnings grew an annual 2.2% in the three months though July, the least since records began in 2001. The Pound continued to decline in the minutes after the report and failed to find any support through the course of the day, despite the sustain upward movement in stocks.
UK stocks advanced for a fourth straight day in London, led by commodity producers, as mining shares climbed higher. The benchmark FTSE 100 Index added 1.8% on the day, to 5,130.6, the highest level in almost a year. The FTSE 100 has now rebounded 46% since the March lows, leaving the measure's valuation roughly 76 times its companies' reported earnings.
Vincent Chaigneau, head of currency and interest-rate strategy at Societe Generale SA, said that "the market had a shock yesterday and the data was not strong enough the reverse the trend. The data confirmed what King said yesterday, which is that we can pretty much rule out a strong recovery. It was a wake-up call for the market."
King told the Treasury Select Committee on Tuesday that the Bank of England is "looking at" cutting the deposit rate to stimulate lending by financial institutions and revive consumer confidence. Banks are currently paid 0.5% on the deposits, and the Central Bank is boosting reserves through asset purchases under its so called quantitative easing policy, King doesn't want them to grow too much.
The Pound has lost 4.2% against the Euro since June, after climbing 12% in the first half of the year, amid concerns that the aggressive fiscal stimulus package isn't working fast enough to drag the economy out of a recession. The UK currency was little changed against the Dollar in the second half but may strengthen to $1.7050 in the "medium term", according to a recent estimate from Commerzbank AG.
Karen Jones. a technical analyst, said yesterday that "Pound-Dollar has sold off to its 50% retracement of the recent leg higher. The move lower is regarded as corrective as we look for dips to be contained by the $1.6320-$1.6250 band for an upside bias to be maintained. Given the recent weakness of the U.S Dollar, the risk has increased for the upmove to then reassert."
EUR/USD
The Dollar declined to the lowest level against the Euro in almost a year yesterday, as an increase in U.S industrial production encouraged investors to sell the Dollar in favour of higher-yielding assets. The Euro-zone inflation was also slightly higher-than-expected and confirmed a headline rate of -0.2% for August, confirming that the ECB will hold monetary policy steady in the short-term.
The U.S industrial output data was better-than-anticipated with a 0.8% increase for August, following an upwardly revised 1% increase the previous month. Consumer prices rose 0.4%, which was also slightly higher than forecast and followed recent comments from a number of Fed officials that indicated a return to conventional policy techniques may be forthcoming.
The Dollar slumped 0.5% against the Euro to $1.4729 in New York, the weakest level since September 25th 2008. Output in U.S factories climbed 0.8% last month, exceeding preliminary estimates, while the cost of living rose 0.4%, and was down 1.5% from August 2008. The increase in risk appetite will continue to be an important factor in driving the Dollar lower, as the Standard & Poor's 500 Index increased a further 1.5% yesterday.
Today's Economic Data 17th September
U.K 09:30 Retail Sales (August)
U.K 11:00 Confederation of British Industry Industrial Orders (September)
EU 10:00 Foreign Trade Balance (July)
U.S 13:30 Housing Starts (August)
- Permits
U.S 13:30 Initial Jobless Claims (w/e 12th Sept)
U.S 15:00 Philly Fed Business Survey (September)
16 September 2009
The Pound declines to the lowest level in 12-years versus the Australian Dollar
GBPEUR/GBPUSD
The Pound plunged to the lowest level since May against the Euro yesterday, dropping towards the technical support level around 1.1270. The UK currency also suffered the biggest decline in two weeks versus the U.S Dollar, after the governor of the Bank of England Mervyn King delivered his quarterly inflation report to Parliament.
In the statement, King said that "the strength and sustainability of the recovery is highly uncertain". Policy makers are also considering lowering the rate they pay financial institutions to hold reserves at the Central Bank to encourage lending. King told the Treasury Select Committee that "above some certain level, you can change the rate at which reserves are remunerated."
The Bank of England is deliberately boosting its reserves buy purchasing £175 billion of bonds through its so-called quantitative easing program. Although King said that he doesn't want to go too far, his comments today will only serve to increase speculation that policy makers will add further fiscal stimulus if the economy endures a slow and protracted recovery.
King told lawmakers in London that "as we engage in asset purchases, it automatically raises reserves in the banking system. We don't want reserves to be unnecessarily high, and we have withdrawn other ways to inject reserves." The Pound dropped after King's statement, declining 1.3% to a low of 1.6405 versus the U.S Dollar.
Ian Stannard, a currency strategist at BNP Paribas SA, said that "the fact that he's mentioned lowering it now suggests it could be a realistic option at the next meeting. It's a sterling-negative event and we're seeing much of the reaction now as the market speculates that it's going to happen." The Pound slid as much as 0.8% versus the Euro to 1.1260, the weakest level since May 18th.
The UK currency actually advanced earlier in the day, amid signs that the UK property market has stabilised in August, as more surveyors reported a gain in home values than a decline for the first time in two years. The report from the Royal Institution of Chartered Surveyors, said that the number of respondents saying that prices rose exceeded those reporting declines by 11 percentage points, the first positive reading since July 2007.
The positive tone of the report adds to recent evidence that the UK housing slump is easing, after prices declined 15% from the peak in 2007. However, while the economy has shown tentative signs towards returning to growth, unemployment has risen to the highest level in 14-years and may provoke further declines if job losses force homeowners to sell their properties.
Simon Rubinsohn, chief economist at RICS, said in an interview yesterday that "it's fair to say that a lack of supply is driving the rise in house prices. It would be foolish to believe prices are going to go up in a straight line from where they are now. I think 2010 will be a more difficult year." That sentiment reflects the pessimistic tone of Mervyn King's statement to Parliament yesterday, as the housing slump is expected to resume next year.
The UK economy has contracted 0.7% in the second quarter, while unemployment has risen to the highest level since 1995. Banks are refusing to revive lending conditions, even after the Bank of England reduced its key interest rate to the lowest level on record, and pumped cash in the financial system by buying billions of pounds of assets with newly created money.
Elsewhere, the Pound also received a boost earlier in the session, after a report from the Office of National Statistics showed that the UK inflation rate dropped in August by less than forecast. Higher oil costs have offset the lingering effects of the recession, as consumer prices rose 1.6% from a year earlier, the least since January 2005, compared with 1.8% the previous month.
The Bank of England last week reiterated its plan to buy £175 billion of government and corporate bonds to cement the country's recovery, as inflation strays further below the 2% target. With unemployment at a 14-year high and the economic slump persisting, policy makers are struggling to fight off the lingering threat of deflation.
Elsewhere, the Pound continued to decline heavily against all of the 16-most actively traded currencies, despite the overall revival in risk appetite. The UK currency is currently at the lowest level in 12-years versus the Australian Dollar, plummeting under 1.90 last night. UK stocks climbed for a third successive day, extending an 11-month high, after reports in the U.S retail sales and manufacturing in New York beat initial forecasts.
EUR/USD
The Dollar rallied from close to a nine-month low against the Euro yesterday, while the U.S currency also advanced significantly versus the Japanese Yen, after a government report showed that retail sales increase in August by the most in three years. The 2.7% increase exceeded initial forecasts, following a 0.2% drop in July and shows unexpected strength in consumer demand.
Treasuries declined as the report erased investors concerns that consumers will make a limited contribution to the recovery, leaving the economy largely dependent on government spending, exactly a year after the collapse of Lehman Brothers Holdings Inc. Robert Stein, a senior economist at First Trust Advisors LP, said that "the most remarkable thing is it wasn't all cash-for-clunkers. The consumer is in recovery and the U.S economy is in recovery."
Elsewhere, the Dollar was also supported by a separate report that showed manufacturing in the New York region grew in September at the fastest pace in nearly two years. The report is a sign that factories are helping pull the economy out the worst recession since the Great Depression. Last month's report was the first time since April 2008 that the reading was above zero, the dividing line between expansion and contraction.
Today's Economic Data 16th September
U.K 09:30 Average Earnings (3 Mths to July)
U.K 09:30 Claimant Count (August)
- ILO Unemployment
EU 10:00 Final HICP (August)
U.S 13:30 Current Account (Q2)
U.S 13:30 Real Earnings (August)
U.S 14:00 TICS Capital Inflows (July)
U.S 14:15 Capacity Utilisation (August)
U.S 14:15 Industrial Production (August)
U.S 18:00 NAHB Housing Market Index (September)
written by Adam Solomon
Labels: daily-insight
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15 September 2009
The Pound declines amid speculation that the housing market slump will resume next year
GBPEUR/GBPUSD
The Pound fell from last week's high of $1.6740 against the Dollar yesterday, while the UK currency also lost ground versus the Euro, falling towards a low of 1.1350 in London. The Pound remains to susceptible to the aggressive swings in risk sentiment but the degree of negative economic data will also play an important role.
Ernst & Young LLC's Item Club revealed in a report yesterday that the UK housing market slump will resume next year, as the squeeze on mortgage lending persists. The research group predicts that after "dipping" in the first half of 2010, house prices will then stagnate for two years. Mortgage finance may "remain scarce and expensive" as banks rebuild balance sheets and replenish capital.
According to a report from the Nationwide Building Society last week, UK house prices rose by the most since 2006 in August, amid a fundamental shortage of supply, but the gains are unlikely to continue. The property market slump, which erased 15% from home values since the decade long housing boom peaked in 2007, has left many mortgage holders owing more than their properties are worth.
Hetal Mehta, a senior economic advisor to the Item Club, said in a statement that "the current stabilisation in the housing market is a false dawn. Price rises largely reflect the acute shortage of available properties, with many homeowners either trapped in negative equity or reluctant to sell for fear of locking in the losses of the past two years."
The Council of Mortgage Lenders said yesterday that UK mortgage approvals rose 24% in July, from the previous month to 56,000 but the Bank of England's latest data indicates that the number of approvals for home loans is less than half the total in the same month two years ago. The Central Bank said last week that it will continue it's quantitative easing policy to buy £175 billion on bonds, while keeping rates at the ultra low level of 0.5%.
Policy makers are clearly trying to cement the economy's recovery from the worst recession in a generation may announce further fiscal stimulus measures should the negative tone of economic data point to a slow and protracted recovery. The Item Club also said yesterday that house prices won't recover to the peak reached in 2007 for another five years.
The Pound dropped from the near the highest level in more than five weeks against the U.S Dollar yesterday, as the benchmark FTSE 100 Index declined 0.8%. UK stocks did erase earlier declines by the close of trading last night, led by a rally in BAE Systems Plc and Cobham Plc. The benchmark FTSE 100 Index added 0.2%, after an initial decline of as much as 1.2%.
The UK currency slumped towards 1.1350 versus the Euro, after the European Commission said that the UK economy will only recover slowly from recession in the second half of the year, as rising unemployment encourages consumers to curb spending. Hans Guenter Redeker, an analyst at BNP Paribas SA, wrote in a report that "the medium term outlook is still bearish in our view. The UK data mix continues to provide negative signals."
The Pound also fell after Moody's Investors Service Ltd said that UK banks are less than half way through posting £240 billion of losses on loans and securities, an alarming reflection of the country's economic weakness. UK banks are likely to record £130 billion of losses in the next 12 to 18 months, in addition to the £110 billion lost since the beginning of the recession.
In terms of economic, the Pound may find some support this morning if the latest inflation data mirrors the recent producer price index, which showed that so-called factory gate inflation accelerated for the sixth straight month. However, consumer prices are widely expected to resume the downward trend in August. Elsewhere, the governor of the Bank of England Mervyn King is due to deliver his quarterly inflation report to Parliament today and his comments may have a telling impact on the market.
EUR/USD
The Dollar declined to the weakest level against the Euro this year, as record low borrowing costs encouraged investors to sell out of U.S assets in favour of higher-yielding currencies. David Bloom, global head of foreign exchange strategy at HSBC Holdings Plc, said that "the low interest rate structure for many years to come in the U.S is going to start undermining the Dollar".
The Dollar lost a further 0.4% in value against the Euro and reached a low of $1.4653 in New York, the weakest level since December 18th. The U.S currency secured some respite in Asian and European trading with gains towards $1.4515 early in the session, before weakening through the course of the day.
The Euro-zone data recorded a small decline in industrial production for July, while second quarter employment fell 0.5%. The declines will reinforce expectations of a very limited regional recovery, although the immediate impact was limited. Underlying confidence in the U.S Dollar remains weak and it is also being hampered by concerns that it will be used as a global funding currency.
Today's Economic Data 15th September
U.K 00:01 RICS House Price Balance (August)
U.K 09:30 Consumer Price Index (August)
- Retail Price Index
U.K 09:30 DCLG House Prices (July)
GER 10:00 ZEW Index (September)
EU 10:00 Labour Costs (Q2)
U.S 13:30 Empire State Index (Sept)
U.S 13:30 Producer Price Index (August)
U.S 13:30 Retail Sales (August)
U.S 15:00 Business Inventories (July)
14 September 2009
The Pound rallies against the majors, after UK producer prices increase for a sixth straight month
Following on from last week, the Pound rose against the Dollar for a second consecutive week, rallying to a high of 1.6740 on Thursday, while the UK currency also made gains versus the Euro. The Bank of England left its bond-purchasing program unchanged at £175 billion this month and kept its benchmark interest rate at a record low of 0.5%.
The Central Bank plans to keep buying as much as £175 billion of government and corporate bonds in a desperate attempt to revive the economy from the worst recession in a generation. The decision by the nine-member monetary policy committee, led by the Governor Mervyn King, was widely anticipated following a spate of surprisingly positive economic data.
Tentative signs that the UK economy is returning to growth also helped push the FTSE 100 Index above 5,000 for the first time in almost a year on Wednesday. Although King and two other policy makers last month argued for an even bigger extension to the quantitative easing program, yesterday's decision suggests that more officials are convinced that a recovery is underway.
Brian Hilliard, chief economist at Societe Generale SA, said that "just because they've done nothing doesn't mean they won't do anything in the future. The economy is turning round but we are underperforming continental Europe. The third quarter growth outlook is miserable, we're out of recession probably but in an anemic way."
The Pound rose as much as 1.4% against the Dollar and the UK currency also made substantial gains against all of the 16-most actively traded currencies. Some investors had speculated that the Bank of England may cut the interest it pays to commercial banks on deposits in an effort to encourage lending. The Central Bank has kept the UK interest rate at a record low since March in an effort to boost the economy. The ECB kept its benchmark rate at 1% for a fourth month on September 3rd, while the U.S Federal Reserve's target range is between zero and 0.25%.
The Prime Minister Gordon Brown, who faces the prospect of a general election in less than a year, said that he wants to avoid complacency and maintain current stimulus measures, as the economy shows "interesting and encouraging" signs of a recovery. The NIESR said the recession probably ended in May, while house prices rose 0.8% in August and a survey of services industries expanded at the fastest pace in almost two years.
The global economic recovery is prompting some suggestions that officials should discuss withdrawing fiscal stimulus and return to tighter monetary policy. The U.S Federal Reserve signaled in the minutes published earlier this month that it's already trying to prepare investors for an end to some of its asset purchases.
Mervyn King, however, is concerned that banks aren't lending enough and he has said on more than one occasion that they have "a very long way to go" before capital and balance sheets are rebuilt. Royal Bank of Scotland Group Plc and Barclays Plc have cut lending, even after promising the government to make more credit available.
UK manufacturing output still showed a contraction in August, after growth the previous month, while retail sales have shown inconsistency as unemployment continues to rise. Mortgage approvals, which rose above 50,000 in July, still remain half the total in the same month two years ago. King wanted to extend the program to £200 billion in August in a minority vote, which was backed by David Miles and Timothy Besley.
The Pound had found additional buying support after a report from Halifax Plc showed that UK house prices rose for a second month in August, as lower borrowing costs encouraged homebuyers. Home values climbed as much as 0.8% to an average of £160,973, after rising 1.2% the previous month. The report adds to speculation that the property slump is easing, as mortgage approvals also jumped to a 15-month high.
Jeremy Stretch, a senior currency strategist at Rabobank International, said yesterday that "we're still left with the same market dynamics as to where Sterling goes from here and that is driven by equities and risk sentiment with fundamentals still rather secondary." That sentiment is particularly evident when analysing the Pound's performance against the U.S Dollar, as investors shy away from the so called safe haven assets.
The Pound also rallied towards the end of the week, after Moody's Investors Service said that the UK is unlikely to lose its top credit rating even after being "severely hit" by the global financial crisis. Both the UK and the U.S are showing "signs of recovery." The Pound advanced against the majors on Friday, after reports showed that UK producer prices increased for a sixth straight month in August.
The UK currency subsequently climbed to the highest level in more than a month against the U.S Dollar, as the FTSE 100 Index surpassed the 5,000 mark for a third straight day, while the Dow Jones Stoxx 600 Index gained for a seventh day. Philipp Nimmermann, a currency strategist at BHF Bank AG, said that "there is some upward potential for the Pound."
In the UK this week, the governor of the Bank of England Mervyn King is due to appear before Parliament on Tuesday and provide testimony on the Central Bank's quarterly inflation report. His comments on the outlook for inflation and monetary policy will be closely watched, amid further speculation that the Bank of England could still extend the bond-purchasing program.
In terms of economic data, the Pound may also come under pressure following the latest consumer prices index, which may show that inflationary pressures subsided in August. Elsewhere, the latest claimant count could show a further deterioration in the UK labour market, as unemployment continues to rise at the fastest pace in 14-years.
EUR/USD
The Euro rallied close to the highest level this year against the Dollar last week, as record low U.S interest rates prompted investors to sell the currency and seek higher-yielding assets. Adrian Owens, a London-based fund manager, said that "the market increasingly believes that the U.S is one of the slowest countries to move rates and that is weighing on the Dollar."
The U.S currency was unable to make any impact during the Asian session and slumped towards $1.46 versus the Euro, after the U.S trade deficit rose sharply to $32 billion for July. Elsewhere, U.S initial jobless claims fell to 550,000 in the latest weekly data, from 576,000 previously. The data will maintain expectations that labour market conditions are gradually improving, after non-farm payrolls were also lower than preliminary estimates.
The Dollar has edged weaker against the Euro on Friday and was at a one-year low on a trade weighted basis, as risk appetite continued to improve. The single currency may rise to a nine-month high against the Dollar this month at $1.4719, a level that represents 100% Fibonacci retracement from the six-month low of $1.2457.
Fibonacci market analysis is based on the theory that prices rise and fall by certain percentages, after reached a high or a low. A break above a point of resistance or below the support level indicates that a currency may move to the next level. Movements in equity and commodity markets will continue to be the driving factor this week, with the Dollar susceptible to the improvement in global risk appetite.
Today's Economic Data 14th September
EU EC Interim Economic Forecasts
EU 10:00 Employment (Q2)
EU 10:00 Industrial Production (July)
11 September 2009
The Pound rallies against the majors, after the Bank of England keep bond purchases on hold
The Pound rose against the Dollar yesterday, rallying to a high of 1.6740 by the close of trading last night, while the UK currency also made gains versus the Euro. The Bank of England left its bond-purchasing program unchanged at £175 billion this month and kept its benchmark interest rate at a record low of 0.5%.
The Central Bank plans to keep buying as much as £175 billion of government and corporate bonds in a desperate attempt to revive the economy from the worst recession in a generation. The decision by the nine-member monetary policy committee, led by the Governor Mervyn King, was widely anticipated following a spate of surprisingly positive economic data.
Tentative signs that the UK economy is returning to growth also helped push the FTSE 100 Index above 5,000 for the first time in almost a year on Wednesday. Although King and two other policy makers last month argued for an even bigger extension to the quantitative easing program, yesterday's decision suggests that more officials are convinced that a recovery is underway.
Brian Hilliard, chief economist at Societe Generale SA, said that "just because they've done nothing today doesn't mean they won't do anything in the future. The economy is turning round but we are underperforming continental Europe. The third quarter growth outlook is miserable, we're out of recession probably but in an anemic way."
The Pound rose as much as 1.4% against the Dollar and the UK currency also made substantial gains against all of the 16-most actively traded currencies. Some investors had speculated that the Bank of England may cut the interest it pays to commercial banks on deposits in an effort to encourage lending. The Central Bank has kept the UK interest rate at a record low since March in an effort to boost the economy. The ECB kept its benchmark rate at 1% for a fourth month on September 3rd, while the U.S Federal Reserve's target range is between zero and 0.25%.
The Prime Minister Gordon Brown, who faces the prospect of a general election in less than a year, said that he wants to avoid complacency and maintain current stimulus measures, as the economy shows "interesting and encouraging" signs of a recovery. The NIESR said the recession probably ended in May, while house prices rose 0.8% in August and a survey of services industries expanded at the fastest pace in almost two years.
The global economic recovery is prompting some suggestions that officials should discuss withdrawing fiscal stimulus and return to tighter monetary policy. The U.S Federal Reserve signaled in the minutes published earlier this month that it's already trying to prepare investors for an end to some of its asset purchases.
Mervyn King, however, is concerned that banks aren't lending enough and he has said on more than one occasion that they have "a very long way to go" before capital and balance sheets are rebuilt. Royal Bank of Scotland Group Plc and Barclays Plc have cut lending, even after promising the government to make more credit available.
UK manufacturing output still showed a contraction in August, after growth the previous month, while retail sales have shown inconsistency as unemployment continues to rise. Mortgage approvals, which rose above 50,000 in July, still remain half the total in the same month two years ago. King wanted to extend the program to £200 billion in August in a minority vote, which was backed by David Miles and Timothy Besley.
The Pound was found additional buying support after a report from Halifax Plc showed that UK house prices rose for a second month in August, as lower borrowing costs encouraged homebuyers. Home values climbed as much as 0.8% to an average of £160,973, after rising 1.2% the previous month. The report adds to speculation that the property slump is easing, as mortgage approvals also jumped to a 15-month high.
Jeremy Stretch, a senior currency strategist at Rabobank International, said yesterday that "we're still left with the same market dynamics as to where Sterling goes from here and that is driven by equities and risk sentiment with fundamentals still rather secondary." That sentiment is particularly evident when analysing the Pound's performance against the U.S Dollar, as investors shy away from the so called safe haven assets.
The Pound also rallied yesterday, after Moody's Investors Service said that the UK is unlikely to lose its top credit rating even after being "severely hit" by the global financial crisis. Both the UK and the U.S are showing "signs of recovery." Overall confidence will still be fragile, especially given the severe underlying debt stresses, but sentiment has remain firm this morning, as global risk appetite was stronger and pushed Sterling above 1.67 versus the Dollar.
EUR/USD
The Euro rallied to the highest level this year against the Dollar, as record low U.S interest rates prompted investors to sell the currency and seek higher-yielding assets. The Dollar also extended its drop versus the Japanese Yen and traded close to the lowest level since February, as demand for the U.S Treasury's $12 billion 30-year bond auction pushed yields lower.
Adrian Owens, a London-based fund manager, said that "the market increasingly believes that the U.S is one of the slowest countries to move rates and that is weighing on the Dollar." The U.S currency was unable to make any impact during the Asian session and slumped towards $1.46 versus the Euro, after the U.S trade deficit rose sharply to $32 billion for July.
Elsewhere, U.S initial jobless claims fell to 550,000 in the latest weekly data, from 576,000 previously. The data will maintain expectations that labour market conditions are gradually improving, after non-farm payrolls were also lower than preliminary estimates. The Dollar has edged weaker against the Euro this morning and was at a one-year low on a trade weighted basis, as risk appetite continued to improve.
Today's Economic Data 11th September
U.K 09:30 Producer Prices (August)
U.S 13:30 Import / Export Prices (August)
U.S 15:00 Michigan Sentiment Index (September)
U.S 19:00 Treasury Budget
10 September 2009
The Dollar declines against the majors, as the underlying improvement in risk appetite continues
The Pound was largely unchanged against the majors yesterday, with further selling pressure above $1.6550 versus the U.S Dollar. The UK trade deficit was unchanged at £6.5 billion for July and there was a tentative increase in import and export volumes, which could offer some degree of support. but the data did not have a major impact on the UK currency.
UK consumer confidence rose to the highest level in over a year in August, amid signs that the economy is rapidly emerging from the worst recession in a generation. The Nationwide index of sentiment rose to a reading of 63.0. the highest level since May 2008, from 61 in July. The National Institute of Economic and Social Research also said said yesterday that the economy has started to grow again.
The report from the NIESR signaled the first improvement in the labour market for 17-months and Martin Gahbauer, chief economist at Nationwide, said that "consumers are beginning to feel more positive not only about the future, but also about the present situation. A number of key economic indicators continue to show that we may have reached the bottom of the current recessionary cycle."
UK gross domestic product increased 0.2% in the three months through August, compared with a decline of 0.3% in the three months through July. Although the trade gap was wider than preliminary estimates in July, as imports from outside the European Union rose faster than exports, the deficit was still unchanged from the previous month.
The labour market, where unemployment reached the highest level in 14-years during the second quarter, may be showing some tentative signs of improvement. According to a report from KPMG and the Recruitment and Employment Federation, a measure of hiring for permanent positions rose above the level of expansion for the first time since March 2008.
However, the lingering threat of deflation may convince policy makers to keep up their measures to stoke economic growth, as the average UK shop prices fell 0.1% year-on-year in August. The Bank of England is expected to leave interest rates unchanged at a record low of 0.5% today but there is a lot of speculation surrounding the prospects of further quantitative easing.
UK stocks advanced yesterday, with the benchmark FTSE 100 Index closing above 5,000 for the first time in almost a year, as gains by oil companies and airlines offset concerns that a six-month rally has outpaced earnings. The Index added 1.2% in London and rallied to the highest level since September 26th. The FTSE 100 has now rallied 42% since the March 3rd low, as earnings at companies rose and the French and German economic enjoyed an unexpected return to growth.
The Pound drew support from the underlying improvement in risk appetite and pushed to a high close to $1.66 against the Dollar in U.S Trading. Nevertheless, the UK currency was again unable to hold above $1.6550 and fell to lows near 1.13 versus the Euro, as we build up to today's announcement. A decision to hold quantitative easing unchanged would provide massive Sterling support, given the recent speculation over additional easing.
The Bank of England governor Mervyn King and two other policy makers within the MPC voted for a more aggressive increase in the bond purchasing plan last month and the mixed tone of recent economic data has led to suggestions that policy makers will increase quantitative easing to £200 billion. An expansion of the bond-buying program would be a significant negative influence on the Pound and the decision is liable to be finely balanced.
EUR/USD
The Euro approached the highest level in nine months against the Dollar yesterday, before a report showed that French industrial production rose for a third straight month in July, adding to recent evidence that the recession is easing. The Dollar fell for a second day against the Pound and the Euro on expectations that Federal Reserve officials will today signal a plan to refrain from raising interest rates.
Susumu Kato, chief economist in Tokyo at Calyon Securities, said yesterday that "risk appetite is coming back on the table, supporting the Euro. The Euro is also benefiting from uncertainty about the U.S economy and the Euro-zone is likely to see a hike in interest rates before the U.S does." The Euro rose to a high of $1.4535 against the Dollar yesterday, the highest level since December 18th.
Underlying confidence in the Dollar is likely to remain weak with further speculation over reserve diversification away from the U.S currency. In the Federal Reserve Beige Book report, most districts noted a gradual improvement in conditions, while manufacturing was expanding. The report overall is likely to create some degree of caution over the economy and may stem a further improvement in risk appetite.
Today's Economic Data 10th September
U.K 00:01 RICS House Price Balance (August)
U.K 00:01 NIESR GDP Estimate (3 Mths to August)
U.K 12:00 Bank of England Policy Announcement
EU 09:00 ECB Monthly Bulletin
U.S 13:30 Weekly Jobless Claims (w/e 5th Sept)
U.S 13:30 External Trade Balance (July)
09 September 2009
The Pound rallies against the majors, as UK manufacturing expands by three times more than expected
The Pound rallied to the highest level in over two weeks versus the U.S Dollar, after a government report yesterday showed that UK manufacturing increased three time as much as forecast in July. Output rose 0.9% from the previous month, when it increased 0.6%, to record the biggest jump in 18-months, boosted by higher production of cars and pharmaceuticals.
Factory production has fallen 10.1% from a year ago but the unexpected increase in manufacturing has led to speculation that the Bank of England will refrain from expanding its £175 billion quantitative easing plan. Policy makers will instead watch for signs that the economy is emerging from the worst recession in a generation and the Pound may continue to rally if economic data points to a recovery.
The increase in manufacturing adds to recent evidence that UK gross domestic product may have stopped contracting in the third quarter. James Knightly, an economist at ING Financial Markets, said in an interview yesterday that "the purchasing managers index is also pointing to very strong output and sterling weakness is pointing to robust outcome."
The Pound rose as much as 1.3% against the Dollar after the report, rising to a high of $1.6560 in London, while the UK currency also held above 1.14 versus the Euro for the majority of the session. The government has offered a £2,000 subsidy for consumers to trade in old cars for new ones in a bid to revive motor manufacturers.
The UK economy contracted 0.7% in the second quarter, less than preliminary estimates and may emerge from a technical recession in the latest GDP numbers. A survey yesterday showed that UK factories' output will decline at the slowest pace in over a year over the next quarter. However, unemployment may continue to climb, after rising to the highest level in 14-years during the second quarter.
The Pound rose against 14 out of the 16 most actively traded currencies and Paul Bednarczyk, a currency strategist at 4Cast Ltd, said yesterday that "Sterling remains fundamentally undervalued." The UK currency rose earlier in the day against the Euro, after a report in Germany showed that industrial production declined 0.9% from June.
The Pound also gained as a report from the National Institute of Economic and Social Research said that UK gross domestic product probably rose for the first time since the quarter through May 2008. GDP increased 0.2% in the three months through August, compared with a decline of 0.3% in the three months through July.
Elsewhere, the Pound was unable to sustain its upward momentum against the Euro, as a report from the British Retail Consortium showed that UK retail sales fell in August for the first time in three months. Consumer confidence remains subdued amid tighter lending conditions and rising unemployment, while consumers are overly cautious on the prospects of an economic revival.
UK stocks pared their advance as utilities and health-care companies declined, while the FTSE 100 Index was little changed by the close of trading last night, having earlier risen by as much as 0.8%. The FTSE 100 rose aggressively earlier this week, amid reports that Cadburys Plc had rejected a takeover bid from Kraft Foods Inc.
According to analysts yesterday, the world's largest confectioner may attract suitors ranging from Nestle SA to Hershey Co and drive the selling price up to $21 billion. The UK based company spurned Kraft's opening offer, saying that it "fundamentally undervalues" the company, as shares surged past their offer prices, suggesting that investors are expecting a higher offer.
The Pound retreated from highs around $1.6580 to $1.65 later in the U.S session and sentiment is liable to very fragile given that the UK budget deficit could approach 15% of gross domestic product this fiscal year. There are also warnings from the government over the need for medium-term spending restraint, which will maintain spending concerns.
EUR/USD
The Dollar dropped to the lowest level this year against the Euro, as prospects of an economic recovery spurred a rally in global stocks and encouraged investors to move away from safe haven assets. Gold prices pushed above $1,000 an ounce and oil pushed to more than $71 a barrel, amid an overall improvement in risk appetite.
The decline in the Dollar pushed the trade-weighted index down by the most since July, as the U.S currency became the cheapest funding currency in the London interbank lending market. Warren Naphtal, chief investment officer at P/E investments, said that "you are seeing a reversal of flight to quality as investors start to put money into higher-yielding assets. The U.S Dollar is a good source for cheap funding"
The Euro also gained support from the latest German trade data with a 2.3% monthly increase in exports. ECB governing council member Axel Weber repeated recent comments from the chairman Jean-Claude Trichet and said that it was too early for the bank to make an exit from extraordinary policy measures.
Today's Economic Data 9th September
U.K 00:01 Nationwide Consumer Confidence (August)
U.K 09:30 External Trade Balance (July)
- Non EU Trade Balance
U.K 11:30 BRC Shop Prices (August)
GER 07:00 CPI - Final (August)
U.S 19:00 Beige Book
U.S President Obama Addresses Congress
07 September 2009
The Pound recovers some gains against the majors, amid an improvement in risk appetite
Following on from last week, the Pound recorded its first first weekly gain in over a month against the U.S Dollar, rising to a high of $1.6440 on Friday, from $1.6270 earlier in the week. The UK currency also recovered some gains versus the Euro, as UK government bonds declined amid reports that indicated that the worst of the global recession is easing.
The increase in risk appetite reduced demand for the security of fixed-income assets and the declines pushed the yield on the 10-year gilt to the highest level in three weeks. U.S employers cut fewer jobs in August that preliminary forecasts, while a report earlier in the week showed that UK service industries expanded at the fastest pace in almost two years.
The U.S non-farm payrolls data showed that employers cut just 216,000 jobs in August, after a 276,000 drop in July. According to a survey from the Chartered Institute for Purchasing and Supply, an index of UK services rose to the highest level since September 2007. Lloyds Banking Group Plc will probably announce this week that UK house prices rose for a second month in August.
Neil Jones, head of European hedge fund sales at Mizuho Corporate Bank Ltd, said that "the Pound is benefiting. The data is getting less bad, which means more risk appetite." The FTSE 100 Index of UK stocks gained 1.2% on Thursday to record the biggest one-day gain in two weeks, while the FTSE 360 Banks Index rose 1.6%, cutting its weekly drop to 3.7%.
While economic data is indicating a recovery in the economy, the Bank of England is trying to sell a record amount of debt to hoist the economy out of the worst recession in a generation. The government is planning to raise £220 billion this fiscal year and may boost sales to £237 billion in the year ending 2011.
The British Chambers of Commerce raised its forecast for UK economic growth next year and cut its estimate for unemployment, as government stimulus measures increase the probability of a recovery. Gross domestic product will expand 1.1% next year, more than the 0.6% increase forecast in June, while unemployment will peak in 2010 at 3 million, rather than 3.2 million.
The BCC also adopted a cautious tone and said that an early removal of stimulus could damage the prospects of an economic recovery. Those comments echo those of policy makers, including the U.S Treasury Secretary Timothy Geithner and the French Finance Minister Christine Lagarde, who met with their counterparts from the G-20 over the weekend.
David Kern, BCC chief economist, said in a statement that "sustaining the recovery will be very challenging and the risks of a relapse are high." The BCC cuts its 2009 forecast, predicting a decline of 4.3%, as company investment slumps 14.5%. The group, which also cited risks from weakness in consumer spending and record public debt, previously thought that the economy would shrink 3.8% this year.
Elsewhere, a survey of manufacturers showed that UK factories' output will decline at the slowest pace in a year in the next quarter, as the economy recovers from the recession. An index of manufacturing output is expected to rise modestly in the next three months but any tentative signs of recovery will be met with caution.
There will be tensions ahead of Thursday's Bank of England rate announcement, following the surprisingly aggressive tone of the minutes from the previous meeting. However, there will not be any significant expectations of a policy change this month and the Pound is being supported by the form tone of risk appetite in the build up to Thursday;s announcement.
EUR/USD
The Euro climbed against the U.S Dollar for a second day on Friday, before a private sector report showed that European investor confidence rose to the highest level since July 2008. The single currency also gained versus a basket of currencies, after a separate report showed that factory orders expanded in July for a fifth straight month.
Takashi Kudo, director of foreign exchange sale at NTT SmartTrade Inc, said that "the positive economic outlook is causing more risk taking, supporting the Euro and commodity currencies, especially the Australian Dollar. Additional positive economic data would further enhance the trend, the Euro may climb to near $1.44."
The Dollar looked to strengthen in the aftermath of the monthly U.S employment report, but was unable to sustain that momentum, weakening back towards $1.43 later in New York. Trading conditions are likely to be subdued today given the impact of a U.S market holiday, but trends for the week as a whole will be important as there is traditionally an re-allocation of funds once the September holiday is finished.
Today's Economic Data 7th September
U.S Market Holiday - Labour Holiday
EU 09:30 Sentix Index (September)
04 September 2009
A better than expected UK services PMI report for August provided a boost for sterling yesterday, with the UK currency hitting a one week high versus the euro as the report helped to offset the disappointment from Tuesday's surprise drop in manufacturing.
The index showed the sector (which accounts for some 75% of the UK economy) expanded at its fastest pace in almost two years last month. However later in the session sterling found it difficult to hold its gains as the market turned cautious ahead of this afternoon's US non-farm payrolls, a key monthly unemployment report, due for release later today
Following recent weakness, the data revived some degree of optimism over underlying economic conditions, although confidence is still likely to be extremely fragile given the ever important issue of rising government debt. Fears over the overall policy requirements during the next few months will likely remain a negative Sterling factor.
Bank lending policy, ( one way many analysts have said is a way to kick-start the economy ) , has once more fallen into the spotlight this morning following the announcement by two of the biggest banks in the UK which have cut lending despite promising the governments to give more credit to borrowers as a way to revive the country's small businesses and housing markets.
The Royal Bank of Scotland Group and Barclays Bank PLC has reduced loans by about 11%, the most among Europe's largest banks. When we consider that the Treasury has bailed out British banks to the tune of £1.4 trillion and the issue surrounding so called 'fat-cat' city bonuses are still in the air, it will be no surprise to hear that confidence in the UK banking system once again comes under scrutiny. Taking from the poor to feed the rich comes to mind.
Yesterday also saw the announcement from the European Central Bank that they will keep rates on hold, which came as little surprise. Market watchers keenly listened to the press conference following the announcement in which President Jean-Claude Trichet struck a note of caution with regard to the recent signs of recovery in the euro zone.
Only marginal upgrades were made to next year's growth forecasts as Trichet warned that "prudence and caution are of the essence". Pickup in activity may be slow with the ECB showing no indications of any urgency to raise interest rates.
The single currency did recover some ground in early morning trading today but activity seems generally subdued as we await the aforementioned US Non-farm payrolls.
A fall of 225'000 in the numbers at work in the US is expected, which is an improvement on July's drop of 247'000 and could indicate further confirmation that the rate of deterioration in the labour market conditions in easing.
Rising joblessness does however underscore the Treasury Secretary Timothy Geithner's judgement that it is "too early" to start exiting from the unprecedented stimulus measures helping to stabilise the economy.
Today's report due for release at 13.30PM in Washington, comes before Geithner meets in London with finance ministers and central bankers from the Group of 20 emerging and developed nations.
More on the G20 and the effect that the Non-Farm Payrolls have on the markets will follow during next week's updates
The Euro pushed higher on Thursday with highs near the 1.4350 level against the dollar ahead of the US open, but it was unable to sustain the gains and weakened again in New York trading.
There was no surprise with the ECB interest rate decision as the central bank left rates on hold at 1.00% following the latest council meeting. There was also a small upgrade to the economic projections with marginal growth expected for 2010.
In contrast, bank President Trichet was very cautious over the outlook, warning that risks to the economies remained high despite the signs of stabilisation. Trichet also stated that exit strategies could be discussed, but that this was no time for tightening policy. The ECB also announced that there would be a further unlimited tender of funds at 1.00% following the first allocation in June. Trichet's overall tone will tend to sap confidence in the Euro-zone and limit any potential Euro support.
The US economic data was close to expectations with jobless claims edging slightly lower to 570,000 from a revised 574,000 the previous week while the ISM index for the non-manufacturing sector strengthened to 48.4 from 46.4 the previous month.
Friday's payroll data could trigger renewed market volatility, especially as there will be potential position adjustment ahead of Monday's US holiday. Unless the data is sharply different from market expectations, the overall reaction may be short-lived as underlying uncertainty over near-term trends persists.
Data Releases 4th September
USD - 13.30 Non Farm Payroll
03 September 2009
Sterling slightly better, but for how long?
We start the day with signs of resilience against both the US Dollar and the euro, with the pound sticking close to recent ranges but recovering from the lows seen earlier this week. With little in the way of any key data yesterday the move was very much a technical correction, and may well be a temporary respite.
The Pound rose overnight to 1.6335 versus the Dollar with a slight move in favour against the Euro, after touching the weakest level we have seen in nearly 8 weeks. The impact that the expansion of the quantitative easing programme has had on the UK markets has been clear to see over the last fortnight, however there were signs yesterday that we may have seen the end of the adverse reaction that has steeped pressure on the Pound over recent trading days.
Caution would still be the buzz word regarding any immediate thoughts that this is the end to the Pound's decline. The 'Green Shoots of Recovery', seemingly a phrase conjured up by the Bank of England and Federal Reserve to sweeten the blow of things to come certainly haven't blossomed into anything worth believing in yet. This is highlighted following the Consumer Debt report earlier this week that showed borrowers repaid debt by the most on record in July (good!) only to have National Debt increased to the tune of £50 Billion by increased quantitative easing in August (bad!).
Alistair Darling has stated that he will plead with other G20 nations to continue spending to ensure that the global economy returns to sustainable growth next year. In an interview with the Independent, he said that "the biggest single risk to recovery is that people think the job is done." In a refreshingly frank interview he went on to say that, "there is a real risk that either governments or people generally think, 'We have done that, we are on the path to recovery'."
Darling will come up against resistance on his plans at the G20 summit this weekend when France and Germany highlight the excessive bank bonus culture, with observers saying that consensus will be hard to reach.
Markets remain in a cautious mood with Wall Street closing down for the fourth consecutive day as investors were unnerved by weaker then expected ADP employment report for August. Factory orders rose for the fourth straight month in July but again the results were below expectations. As a result, fresh clouds hang over the financial markets in the run up to tomorrow's Non-Farm Payrolls data.
The minutes of the last Federal Reserve Meeting stated that the risks in place that were adverse to the economy have eased "considerably". At the same time, however, it worries about the prospect of weak growth ahead and thus shows no signs of exiting its extremely accommodative policy stance.
T he European Central Bank meets today at 12.45PM with rates expected to be left on hold at 1%. As always however, markets will closely watch the press conference following the announcement later in the afternoon, which will outline the details of the central bank's latest growth and inflation forecasts.
It will be interesting to to see how the recent improving trend in data impacts on the ECB's medium term outlook.
EUR/USD
The euro rose against the dollar as stocks in Europe and Asia advanced and on speculation the European Central Bank may increase its growth projections when it decides on interest rates today.
The euro posted its second day in gains against the dollar on bets that the ECB will raise its forecast after French and German gross domestic product expanded in the second quarter. It was looking good against the dollar and then a report that may show retail sales in the euro region rose in July. The Dow Jones Stoxx 600 index of European shares rose for the first time this week.
"The Euro is in uptrend against the dollar," Ralf Umlauf, head of floor research at Helba Landesbank Hessen-Thueringen in Frankfurt, wrote in a report today. "The new growth projections of the ECB council should take account of the surprisingly good GDP results for the second-quarter in Germany and France, as well as the continues recovery in the important sentiment and leading indicators.
The euro climbed to $1.4294 from yesterday morning to $1.4264 in New York yesterday.
Data Releases 3rd September
EU Market Services PMI - August
UK CIPS Services PMI - Composite PMI
EU Retail Sales
U.S ECB Rate Announcement
U.S ECB Press Conference
U.S Weekly Jobless Claims
U.S Services ISM - August
02 September 2009
The Pound declines after UK manufacturing unexpectedly contracts
The Pound was on the defensive yesterday, weakening sharply against the U.S Dollar to trade under $1.62 last night, after economic data showed that UK manufacturing unexpectedly contracted last month. The UK currency also traded close to the lowest level since June versus the Euro, as the report added to recent evidence that the recession has further to run.
According to a report from the Chartered Institute of Purchasing and Supply, an index of manufacturing output dropped to a reading of 49.7 in August to indicate contraction, down from 50.2 in July. Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd, said that "the fact that it's below that 50 level is a big disappointment psychologically for the market. I'm not surprised to see Sterling selling off a little bit."
The Pound weakened to a low of 1.6120 versus the Dollar last night and was little changed versus the Euro, after touching the weakest level since June 5th. The UK currency also came under selling pressure, as the Bank of England said that consumers repaid debt by the most on record in July, indicating that policy makers were wrong to expand upon the quantitative easing program.
UK mortgage approvals rose to the highest level in 15-months in a separate survey released yesterday, a further sign that the property sharp is abating as the economy stumbles through the worst recession since the Second World War. Banks granted 50,123 new home loans in July, compared to just 47,891 in June, but the figure was largely in line with expectations and had a minimal impact.
Recent economic reports suggest that house prices are rising as more affordable homes and marginally lower borrowing costs encouraged buyers. Banks have become more willing to lend, as the Bank of England pumps up to £175 billion into the economy and boosted confidence. Philip Shaw, chief economist at Investec Securities, said yesterday that "we've seen a steady upward grind in mortgage approvals in the last six months."
The Bank of England anticipates a slow and protracted recovery in the housing market and are wary that prices may carry on rising. Unemployment is already at the highest level in 14-years and will probably keep climbing long after the recession has ended. Across Britain, house prices have fallen 20% since a decade long property boom peaked in August 2007, with almost £40,000 wiped off the average home.
Halifax are still approving mortgages at half the rate averaged since 2000 but a shortage of homes for sale is helping underpin values. House prices in England and Wales rose for the first time in five years in July and yesterday's report suggests that efforts to spur growth may be slow, as households shoulder a record £1.5 trillion of debt.
Consumers paid off more than they borrowed last month, repaying a net £418 million of debt secured on dwellings, the first repayment since records began in April 1993. There was also a net repayment of consumer credit of £217 million, also the most on record. The UK economy contracted 0.7% in the second quarter, less than preliminary estimates, while growth may resume in the third quarter.
There will also be fresh concerns that a fundamental lack of credit and an unwillingness to borrow will limit the scope for an economic recovery. The Pound will also continue to be strongly influenced by degrees of risk appetite and the UK currency will come under significant pressure if global equity markets remain weak.
UK stocks fell yesterday after reported spurred concerns that the economy's rebound from a recession will be uneven. The benchmark FTSE 100 Index fell 0.5% in London, after earlier declining as much as 1.5%. The index has still rebounded 39% from the lowest level in six years on March 3rd, lifting its price-to-earnings ratio to the highest since 2002.
Elizabeth Andrew, chief currency strategist at Nordea Bank AB, said yesterday that "the worst is probably over for the Pound. We believe it will strengthen a bit as market indicators continue to improve." According to HSBC Holdings Plc, the Pound's losses won't last and the UK currency will resume gains on bets that the Bank of England will raise interest rates before the U.S Federal Reserve.
Paul Mackel, a director of currency strategy at HSBC, said that yesterday's decline was a "knee-jerk" reaction to the manufacturing data and the Pound will end the year at $1.62, before rising to $1.75 in 2010. "For now, the market is looking for holes in the UK recovery story and today it found one, and that's why they sold the Pound. Longer-term, the outlook remains positive, but that's likely to be a story for 2010 when it becomes clear that the Bank of England is going to raise rates before the Fed."
EUR/USD
The Euro failed on to hold on to gains above the $1.4350 against the U.S Dollar yesterday and dipped sharply in New York, as global stock market fell and encouraged investors back to the relative security of Dollar denominated assets. The Dollar pushed towards a two week high against the Euro on a trade weighted basis, as U.S economic reports were also stronger-than-expected.
According to a report from the Institute of Supply Management, U.S manufacturing expanded for the first time in 19-months, posting its biggest two-month gains since 1983. Elsewhere, pending sales of existing homes rose than initial forecasts, indicating that the worst recession since the Wall Street Crash has ended.
Yesterday's figures underline suggestions that the Fed's efforts to unfreeze credit is renewing demand and incipient recovery may sow the divisions on whether policy makers begin withdrawing fiscal stimulus measures. Two Fed officials over the past week alone have signaled that the Reserve Bank may not need to fulfill its asset purchase commitments.
In recent weeks, the Dollar has tended to lose ground on favourable data releases, but there was a markedly different reaction this time around. This is due to hopes that the U.S manufacturing sector will be able to rebound at a faster pace that the European sector. The Dollar also gained amid rumours of fresh difficulties within the banking sector, which put downward pressure on the market and triggered some defensive Dollar demand.
The Euro was unsettled by comments from the German Finance Minister Steinbrueck, who stated that financing conditions were liable to deteriorate over the next few months. There are also concerns that the Euro is still over-valued at current levels, while underlying Dollar confidence is weak. In this environment, it may prove difficult for markets to trigger a decisive move with the Euro just above $1.42 this morning.
Today's Economic Data 2nd September
EU EU Economic and Monetary Affairs Committee Meets
EU 10:00 Gross Domestic Product (Q2 - Revised)
EU 10:00 Producer Prices (July)
U.S 13:15 ADP Employment (August)
U.S 13:30 Productivity (Q2 - Revised)
- Labour Costs
U.S 15:00 Factory Orders (July)
U.S 19:00 Minutes of
01 September 2009
The Pound may continue to decline against the majors, ahead of the PMI manufacturing report
GBPEUR/GBPUSD
Following on from last week, the Pound fell for a fourth straight day against the U.S Dollar, while the UK currency also touched a fresh 3-month low of 1.1329 versus the Euro. The Confederation of British Industry reported that business investment and consumer spending data added to recent evidence that the UK recession may have further to run.
A government report last week showed that business confidence slumped by the most in 24-years during the second quarter, while an index of UK retail sales fell in August. The Bank of England took the decision earlier this month to extend its bond-purchasing program to pull the economy out of the worst recession in a generation, while keeping interest rates at the lowest level on record.
Geoffrey Yu, a currency strategist at UBS AG, said that "the market is quite bearish on the currency. The Bank of England's actions and decisions have shown they are not as confident on the UK economy as the market expected them to be, and now the market's adjusting." The Pound had rallied to the highest level this year prior to August 6th, when the Monetary Policy Committee elected to expand on its quantitative easing program by £50 billion.
The Pound fell a further 0.3% against the Dollar on Thursday to a low of $1.6207, and continued that trend into Friday, while the UK currency also touched upon the lowest level since June versus the Euro. Business investment fell 10.4% from the first three months of 2009, the biggest drop since the second quarter of 1985. Spending also fell 18.4% from the same period last year, the biggest annual decline since 2006.
Retailers saying that sales fell from a year earlier outnumbered those reporting gains by 16 percentage points, compared with 15 percentage points in July. Elsewhere, The Pound continued to decline even as the Nationwide Building Society reported house prices climbed in August by the most since December 2006.
The average cost of a home in Britain climbed 1.6%, the most in more than two and a half years this month, as lower interest rates increased demand and a fundamental lack of properties for sale underpinned values. Economists had predicted an increase of just 0.5% but the Pound failed to find any support because the positive tone of the report added to suggestions that the Bank of England were wrong to expand on its bond-purchasing program.
Yesterday's report adds to recent evidence that the housing market is stabilising, as the lack of supply props up prices. Nick Kounis, an economist at Fortis Bank, said that "demand for homes is also firming on the back of a gradual improvement in mortgage availability and the brighter economic outlook. The main message from the Nationwide report is that the recovery in house prices is picking up steam."
The increase in UK house prices this month was the fourth in succession, leaving them 3.2% higher than at the end of 2008. In the three months through August, prices rose by an average of 3.3% from the previous three months, the most since February 2007. House prices are still down 14.4% from their peak in October 2007.
A survey from the Bank of England last week showed that Britain's six largest banks have approved more home loans in July, as approvals rose to the highest level since February 2008 but recent house price increases may become difficult to sustain. If the unprecedented quantitative easing program is ultimately successful then the Central Bank will have little option but to raise interest rates from the lowest level on record.
Martin Gahbauer, Nationwide's chief economist, said in a statement yesterday that "a rise in interest rates is probably still some way off. However, the eventual exit from exceptionally loose monetary policy could make the recovery in the housing market bumpier than some might expect after the last few months of price increases."
The Pound may extend its recent losses against the majors should inflation keep accelerating faster than expected, fueling concerns that the Bank of England is losing the battle against rising prices. Bank of England policy makers voted 6-3 to raise bond purchases by another £50 billion to £175 billion. The Governor Mervyn King and two other members were overruled in a push to expand the bank's program to £200 billion.
Ulrich Leuchtmann, head of currency research at Commerzbank, said that "while other central banks have started to talk about exit strategies, the Bank of England is making its policy stance even more expansive. The news of the expansion has raised credibility concerns and people are starting to wonder if they are overdoing it, therefore demanding a risk premium. This speaks for weaker Sterling."
The Pound has declined 3.1% against the Euro in August, the steepest decline among the 16-most actively traded currencies. The UK inflation rate held steady at 1.8% in July, exceeding initial forecasts, after King said on August 12th that inflation may drop more than a percentage point below the Bank of England's 2% target.
The Pound managed to stem the constant flow of losses on Friday, after a report from the Office of National Statistics showed that the UK economy contracted by less than previously estimated in the second quarter. Manufacturing, auto services and government spending helped mitigate the biggest slump in business investment for 24-years.
UK gross domestic product fell 0.7%, modestly less than the 0.8% calculated last month, as the economy shrank 5.5% from a year previously, the most since records began in 1955. Recent estimates from the Bank of England have shown that the recession proved worse than predicted in May. While growth may resume in the third quarter, the economy is likely to take until almost 2012 to recover.
The Pound stayed higher against the Dollar and the Euro after the report on Friday, after the statistics office said that the revisions to gross domestic product in the last quarter were due to manufacturing, energy extraction and wholesale services. Bank of England forecasts published last month show output expanding in the third and fourth quarters, with growth resuming on an annual basis from the first quarter.
UK economic confidence does, however, remain weaker with persistent fears over the medium-term outlook. Degress of international risk appetite will also be an important factor, with the decline in global equity markets keeping the Pound under pressure. The PM data will be watched closely on Tuesday and a positive reading would tend to provide some degree of currency support, although underlying sentiment is liable to remain broadly negative.
EUR/USD
The Euro approached the highest level in three weeks against the U.S Dollar on Friday, after German retail sales increased for the first time in three months, adding to recent evidence that Europe's largest economy is emerging from the recession. The single currency also gained for the first time in six days versus the Japanese Yen.
The Euro rose to a high of $1.4361 versus the U.S Dollar, after reaching the highest level since August 7th earlier in the session. European Central Bank governing council member Ewald Nowotny said last week that he doesn't expect a double-dip recession the region, as long as policy makers don't hurry to remove emergency stimulus measures.
The Dollar gained initial support yesterday, as risk aversion spiked higher and the principal trigger for the move was a sharp decline in Chinese equity markets with the Shanghai composite index falling by over 6.5%. The Euro dipped to a low near $1.4250 against the Dollar, as the Flash estimate of Euro-zone inflation was slightly higher-than-forecast.
Today's Economic Data 1st September
U.K 09:30 CIPS Manufacturing PMI (August)
U.K 09:30 Consumer Credit (July)
- Mortgage Lending / Applications
EU 10:00 Unemployment Rate (July)
EU 09:00 Markit Manufacturing PMI (August)
U.S 15:00 Manufacturing ISM (August)
U.S 15:00 Construction Spending (July)
U.S 15:00 Pending Home Sales (July)
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