GBPEUR/GBPUSD

The Pound fell against through key support at $1.6400 against the Dollar yesterday, as gilts rose and stocks plunged, following reports that U.S employment increased speculation that the global recession won't end any time soon. Bank of England policy maker Dales Miles also said that banks remain on "life support".

The UK currency also traded through 1.1630 versus the Euro, as the FTSE 100 Index dropped 2.5% in London, led by a sell-off in commodity prices, after the monthly U.S job report confirmed that more jobs were lost last month than economists' had predicted. The FTSE has still climbed 21% from the low of the year on March 3rd, amid speculation that the economic slowdown is easing, but the Pound will remain susceptible to volatile swings in risk sentiment.

Manoj Ladw, a senior trader at ETX Capital, said that "the U.S unemployment rate continues to creep towards the 10% mark. As long as jobs are lost, it's difficult to see a near-term end to this recession." Yesterday's government report showed that U.S employers cut an additional 467,000 jobs in June, while the jobless rate climbed to 9.5%, the highest level since 1983.

Economists' had predicted a 322,000 decline in non-farm payrolls, while job losses peaked at 741,000 in January, the biggest monthly amount since 1949. The increase in risk aversion encouraged investors back to the relative security of safe haven assets, as the advance in the U.S jobless rate pushed the yield on the two-year note down by the most in a week.

Britain sold £2.5 billion of 30-year gilts yesterday as it boosts borrowing to record levels to finance measures in order to drag the economy of the worst recession in a generation. The Pound dropped 0,5% to a low of $1.6386, the lowest level in nearly two weeks, but the UK currency recovered most of its losses versus the Euro, closing 0.4% higher last night.

A survey of UK construction released yesterday added to recent evidence that the economy is far from a recovery. An index based on a survey of purchasing managers at building companies fell to a level of 44.5 in June, from 45.9 in May. BoE policy maker Miles told Parliament's Treasury Committee that "whilst a return to growth does seem plausible and policy is gaining traction in the economy, the idea that we will return to rapid growth that will be sustained over several years seems pretty unlikely."

The Bank of England said that lenders expect to increase credit to households and companies in the next three months. The Pound may weaken considerably against the U.S Dollar as investors withdraw funds from the UK amid political wrangling over the country's public debt burden. The UK currency is still up 12% against the Dollar this year but is little changed in the past five trading days.

Simon Derrick, chief currency strategist at Bank of New York Mellon, said that "we suspect that the Pound weakness may only just be starting. The company's forecast for the Pound to reach $1.80 by the end of the third quarter is now under review." Sterling is still being hampered by concerns over the UK debt position and it failed to hold its best levels against the Dollar, with a retreat back through the $1.65 level.

EUR/USD

The Dollar was unable to break through key support in the $1.40 region versus the Euro yesterday and retained a generally weaker tone through the course of the day. The Euro gained some initial buying support from a slightly stronger-than-expected German retail sales data, while global risk appetite was also firmer which helped underpin the single currency.

U.S economic reports were mixed and did not have a decisive impact on the market, as the ISM index for manufacturing rose marginally above preliminary expectations, although there was some disappointment that the orders index slipped back to below the 50 level. That suggests that any recovery in the industrial sector will stall relatively quickly.

The European Central Bank elected to keep interest rates on hold at a record low of 1% yesterday and the Chairman Jean-Claude Trichet signaled that the central bank will keep rates unchanged over the coming months. Officials will deploy new tools to fight the worst recession since the Second World War, such as purchasing covered bonds.

The Euro weakened in the aftermath of the statement, as Trichet refused to rule out the option of further rate cuts, saying that "we did not decide today that this was the lowest level we would attain under any circumstances." The ECB has reduced its main rate by 325 basis point since October to bolster the economy and flooded the banking system with hundreds of billion of euros.

Data Released 3rd July

U.K 09:28 CIPS Services PMI (June)

EU 08:58 Markit Services PMI (June)

EU 10:00 Retail Sales (May)

U.S Independence Day Market Holiday

written by Adam Solomon

Labels: daily-insight