GBPEUR/GBPUSD

The Pound dropped below $1.6000 against the Dollar for the first time since June yesterday, while the UK currency also lost further ground versus the Euro, after house prices unexpectedly fell in June and former Bank of England policy maker Stephen Nickell said that the property market may be slow to recover. The Halifax house price index showed that home values declined 0.5% to an average of £157,713, after jumping 2.6% the previous month.

The UK currency has come under significant pressure against all of the 16-most actively traded currencies, as speculation that Britain is through the worst of the recession may be premature. Martin Ellis, an economist at Halifax, said in a statement that "whilst there have been encouraging recent signs of improvement, the outlook for the UK economy remains uncertain with unemployment set to continue rising for some time."

There will probably be a mixed monthly pattern of monthly house prices rises and falls for the remainder of the year, as banks' reluctance to lend, particularly to first-time buyers, will make it "very difficult" for the housing sector to recover. According to the National Institute of Economic and Social Research, the recession extended into a fifth quarter in the three months through June.

UK gross domestic product dropped 0.4% in the second quarter, the slowest pace on contraction in a year and the economy may now be stagnating following the worst recession almost 40-years. However, the tentative signs of economic recovery have caused UK stocks to swing between gains and losses over the course of this week, further undermining confidence in the Pound.

Howard Archer, an economist at IHS Global Insight, said that "further relapses in house prices remain highly likely, and they could yet fall by another 10% from current levels. Much will clearly depend on whether or not the economy can sustain its recent overall improvement, how much further unemployment rises and how many properties come on to the market over the coming months."

UK stocks dropped for a third successive day yesterday, as the unexpected decline in house prices increased concerns that second quarter earnings may disappoint investors. Aviva Plc and Prudential Plc tumbled over 6% in London, after Bank of America Corp reduced its profit forecasts for the two insurers. The benchmark FTSE 100 Index lost 1.1% to 4,140.23, the lowest level since April 28th.

Stocks have slid 8.1% from the peak on June 1st, amid speculation that prices have outpaced the outlook for earnings expectations and economic growth, as the three month rally pushed the valuations to the highest level in five years. Omer Bhatti, head of sales trading at WorldSpreads Group Plc, said that "there has been a lack of positive commentary from companies and we are waiting for the next earnings seasonal period to come through. This need to feed through to investor appetite."

The Pound has plummeted through key support at $1.62 versus the Dollar and looks poised to test new lows as global risk appetite deteriorates. The UK currency also extended recent losses versus the Euro, despite reports that consumer confidence rose to an eight-month high in June, as shoppers became more optimistic that the economy will recover from the recession.

An index of sentiment rose to a level of 58 in June, from 54 the previous month, as most people expect the economic situation to improve in six months, despite unemployment rising to the highest level in 12-years. Bank of England policy makers have conveyed some concern that the recovery may falter as banks restrict lending to consumers and companies.

A measure of hiring for permanent jobs shrank at the slowest pace in June but the British Chamber of Commerce said on Tuesday that while the worst of the recession was over, a recovery was not yet guaranteed. UK factory production unexpectedly fell in May for the first time in three months and house prices declined 0.5% in June.

Unemployment continues to rise, with the BCC expecting the number of jobless people to increase by another 1 million to 3.2 million by the middle of 2010. More than half of people surveyed by Nationwide expect there will be fewer jobs by the end of the year. The International Monetary Fund raised its 2010 economic forecast for the UK and suggested that the worst of the recession may be past.

UK gilts also rose yesterday, pushing the 10-year yield to its lowest level since June 30th, as the Bank of England bought £3 billion of government debt, as part of its program to lower borrowing costs. The Central Bank are expected to convene at midday today and will keep interest rates unchanged at a record low of 0.5%.

The monetary policy committee may say that it will extend buybacks beyond the £125 billion already allocated and any such move would tend to undermine sterling sentiment and pushed the Pound back under $1.6000 versus the Dollar. The UK currency is also unsettled by underlying fears surrounding the debt position if the economy fails to improve significantly.

EUR/USD

The Euro was unable to make any headway against the Dollar during European trading on Wednesday and retained a generally weaker tone, as risk appetite deteriorated again and increased the allure of Dollar denominated assets. Global stocks fell, which undermined demand for the Euro and also triggered fresh defensive support for the Dollar.

Euro-zone gross domestic product was left unrevised at a decline of 2.5% for the first-quarter final reading, while the annual drop was slightly larger-than-expected. The impact on the market was limited, as separate reports showed that German industrial production data was sharply better than initial forecasts with output rising 3.7% from May, following a revised 2.6% decline the previous month.

The Euro weakened to lows below $1.3850 during U.S trading before staging a modest recovery as Wall Street rallied. Consumer credit declined for the fourth consecutive month according to the latest reports, illustrating that consumer spending levels will tend to be subdued and this will maintain a mood of caution in financial markets.

Data Released 8th July

U.K 09:30 External Trade Balance – Global (May)

U.K 12:00 BoE Policy Announcement

EU 09:00 ECB Monthly Bulletin

U.S 13:30 Weekly Jobless Claims (w/e 3rd July)

written by Adam Solomon

Labels: daily-insight