GBPEUR/GBPUSD

The Pound continued to decline against the U.S Dollar yesterday, falling to a low of $1.6264 in London, after the Royal Bank of Scotland Group Plc said that it will sell assets and need additional government stimulus. Sterling subsequently weakened for a third day against the Dollar, amid speculation that financial institutions have yet to recover from the economic crisis.

Royal Bank of Scotland Plc and Lloyds Banking Group Plc will receive £31.3 billion in a second government bailout from the UK taxpayer, as the two banks agreed to cap bonuses. The Treasury will inject £25.5 billion of capital into RBS, for a total of £45.5 billion, making it the most expensive bailout of any bank worldwide.

The government will also fund about a quarter of Lloyds's £21 billion fundraising and both banks said that they won't may cash bonuses to workers earning more than £39,000 this year. The second bailout since the beginning of the financial crisis will bring the government closer towards full ownership over RBS, while Lloyds will escape government control.

Daniel Gabay, director of Fathom Consulting in London, said that "there is now a very fine line between RBS being nationalised. This contrasts with Lloyds willing to fight harder for its independence." Share prices fell as much as 12% and traded down 11.5% in London trading, while Lloyds climbed 1.5%.

Steven Barrow, head of Group of 10 research at Standard Bank Plc, said that "when banks have problems it's the Pound that suffers. We're in a bank dominated economy." The UK currency fell 0.6% in value against the Dollar but the Pound has continued to make gains versus the Euro, trading up to 1.1170 by the close of trading last night.

The purchase of more banking shares will add around £13 billion to the government's net cash requirement for this year, compared with the amount announced in the country's 2009 budget. Jeremy Stretch, a senior currency strategist at Rabobank International, said "the banking sector is still pretty weak. We're seeing a flow back toward the perceived safe haven of the Dollar."

The Bank of England's monetary policy committee will decide on November 5th whether to extend the bond-purchasing program beyond £175 billion, designed to lower borrowing costs and stimulate the economy. According the median estimate of economists polled, policy makers will increase purchases to £225 billion.

Former policy maker DeAnne Julius said yesterday that the BoE should cap its bond purchase plan at £200 billion, in a signal that it will stop buying assets with newly created money in the next quarter. Julius said "I would, at this meeting, ask for a small extension, say £25 billion, just to have in our back pocket in case we need to use it. But I'd be aiming to use it at a diminishing rate and looking at February to pause completely."

However, the program has thus far failed to bring the economy out of the worst recession ever recorded but shutting it down right now would be a shock to investors. The latest quarterly growth figures unexpectedly confirmed that the UK economy is still languishing in a recession, after six consecutive quarters of contraction.

Policy makers, led by the governor Mervyn King, elected to extend the quantitative easing policy by a further £50 billion for a second time in August, after starting the program in March with a £75 billion target. The European Commission said today that the region's banking industry remains "fragile" and further losses at financial institutions may total £400 billion euros.

Elsewhere, HSBC Holdings Plc, Europe's largest bank, is cutting 1,700 administrative jobs in the UK, more than 4% of its workforce in Britain. HSBC employs roughly 40,000 people in the UK and will eliminate roles in Southampton, Sheffield and Southend, adding to the highest unemployment rate in twelve years.

In a slightly more positive tone, UK house prices increased by twice as much as initial forecasts in October, as record low interest rates and a limited supply of homes buoyed the property market. Home values climbed 1.2% to an average of £165,528, after rising 1.5% in September, and demand for housing seems to be improving.

EUR/USD

The Dollar rallied to the strongest level versus the Euro in a month yesterday, amid evidence that banks are struggling to shake off the effects of the financial crisis, reducing demand for higher-yielding currencies. The U.S currency strengthened on speculation that Federal Reserve policy makers are discussing the outlook for record low borrowing costs, in preparation for the announcement today.

Steven Pearson, head of G-10 currency strategy at Bank of America Corp, said "when risk appetite falters, the Dollar still catches a bid. That is likely to remain the case for the foreseeable future as the Dollar remains the defensive currency of choice." The Dollar appreciated 0.4% against the Euro to $1.4716 in New York, after touching the strongest level since October 5th.

According to Commerzbank AG, the Dollar's revival may be short-lived and the U.S currency may extend its decline, returning to $1.50 against the Euro within the next two weeks. There is nothing to indicate "a long-term flight to safety" among investors and a report yesterday showed that U.S manufacturing grew at the fastest pace in three years.

The European Commission reported yesterday that the Euro-zone economy will return to growth next year, as it raised its forecasts even as budget deficits and unemployment swelled to the highest levels since records began in 1995. The economy will expand 0.7% in 2010 and 1.5% in 2011, after contracting 4% this year.

Data Released 4th November

U.K 00:01 Nationwide Consumer Confidence (October)

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

EU 08:58 Market Services PMI (October) - Composite PMI

EU 10:00 Producer Price Index (September)

U.S 13:15 ADP Employment Report (October)

U.S 15:00 ISM Non-Manufacturing PMI (October) - Business Activity

U.S 19:15 FOMC Rate Announcement

written by Adam Solomon

Labels: daily-insight