GBPEUR/GBPUSD

The Pound extended its decline against the Dollar yesterday, falling a further 0.6% on the session, to a low of $1.6383. The UK currency fell through significant support levels at $1.6400 against the Dollar and 1.1630 versus the Euro, as global risk appetite disintectrated and stocks plunged worldwide. The Pound also fell back under 1.1700 versus the Euro, after a government report showed that UK gross domestic product in the first quarter contracted by the most since 1958.

UK stocks fell as the economy shrank by more than preliminary forecasts and investors speculated that the steepest quarterly increase in the FTSE 100 Index in nearly six years has outpaced earnings expectations. The benchmark FTSE 100 lost 1% on the day and the Pound dropped as risk appetite declined.

The Pound has retreated from its highest level in more than eight months against the Dollar, touching a high of $1.6740 on Tuesday, after the Office of National Statistics said that the UK economy declined 2.4%. According to RBC Capitals, the report may have set off automatic sell orders for the Pound. Adam Cole, global head of currency strategy at RBC, said that "the sell-off at the back of the growth numbers probably triggered stops on long-pound trades. The outperformance of sterling is a sustainable trend." A long position is a bet on an asset rising in value.

The Pound fell 1.3% against the Dollar to a low of $1.6387 in New York, after rising earlier as much as 1.1%, to the highest level since October 21st. The UK currency also declined 0.4% against the Euro but although the GDP report contributed to the decline, improved data from other parts of the economy has put the Pound on course for its biggest quarterly advance against the Dollar in more than 21-years.

An index of manufacturing output rose more than initial forecasts in June, to record the smallest contraction in over a year, providing further evidence that the recession is easing. A gauge based on a survey of factory output climbed to a reading of 47, the highest level since May 2008, and just under a level that would indicate growth in the sector.

The report from the Chartered Institute of Purchasing and Supply indicated that the UK economy may b past the worst of the slump, after reports earlier this week showed the biggest contraction since 1958 during the first quarter. Former Bank of England Deputy Governor Rachel Lomax said yesterday that the economy is "showing some signs of stabilizing" after the central bank cut interest rates and started printing money to revive growth.

David Noble, chief executive office at CIPS, said in a statement yesterday "after months of doom and gloom, there are some signs of relief for the UK manufacturing sector. It may finally be coming out of a recession." However, the economy is still mired in the worst recession for at least thirty years and that is hurting manufacturers' profitability. The net rate of return was 6.8% in the first quarter, the lowest level since 1992.

Unemployment is still rising at the fastest rate in 12-years, after the economy shrank 2.4% in the first three months of the year. Tata Motors Ltd, the Indian truckmaker that owns Jaguar and Land Rover, posted its first annual loss in at least seven years last month, after sales at the luxury units plunged amid the global recession.

The Bank of England last month kept UK interest rates on hold at a record low of 0.5% and maintained the £125 billion asset insurance program to bolster the economy through the purchase of government and corporate bonds with newly created money. The next interest rate decision is scheduled for July 9th but the European Central Bank convene this lunchtime and are expected to keep rates unchanged at 1%.

The Euro is gaining against Sterling amid speculation that the ECB's governing council members will maintain the yield advantage and refuse to lower borrowing costs below the 1% threshold. The focus of attention will switch the accompanying press conference where the chairman, Jean-Claude Trichet, may talk about 'green shoots' in the economy, further bolster the appetite for the Euro.

Euro and Dollar buyers have been advised to look at the benefits of using stop orders to protect against a further move to the downside, as the degree of risk aversion sweeping back into the market curtails the Pounds momentum. The UK currency is still being hampered by renewed fears over the debt position. Job losses at UK banks reeling from the global financial crisis surpassed 55,000 with firms forecasting further cuts and that will also weigh on retail sales and consumer sentiment.

EUR/USD

The Dollar was unable to break through key support in the $1.4000 region against the Euro on Wednesday and retained a generally weaker tone throughout the day. The single currency gained some initial support from a slightly more positive report on German retail sales. The U.S economic data was mixed as the ISM index for the manufacturing sector rose to a reading of 44.8 in June, which was marginally above expectations.

There was some disappointment that the orders component of the ISM report slipped back below the 50.0 level, suggesting a significant risk that any recovery in the industrial sector will stall relatively quickly given the underlying vulnerabilities. The ADP employment report also recorded a private sector decline of 473,000 for June, after a revised 485,000 drop the previous month.

The ADP report provides an insight into the non-farm payrolls numbers this afternoon, which are expected to show a further deterioration in the labour market. The Dollar is also weakening amid reports that the Chinese authorities had called for the issue of reserve diversification and the introduction of a new reserve currency to be discussed at the G8 meeting next week.

Data Released 2nd July

EU 10:00 Producer Price Index (May)

EU 10:00 Unemployment Rate (May)

EU 12:45 ECB Interest Rate Announcement

EU 13:30 ECB Press Conference

U.S 13:30 Initial Jobless Claims (w/e 26th June)

U.S 13:30 Non-farm Payrolls (June)

- Average Earnings

U.S 15:00 Factory Orders (May)

written by Adam Solomon

Labels: daily-insight