GBPEUR/GBPUSD

The Pound weakened against all of the 16 most actively traded currencies yesterday, after the Bank of England Governor Mervyn King said that policy makers 'will keep an open mind' on additional quantitative easing and said that a weaker currency should lead to an economic recovery. The Central Bank's quarterly inflation report sparked the decline, as the UK currency fell to 1.1050 versus the Euro.

The tone and language used in King's statement seemed to indicate the overriding pessimism with the Bank of England and signaled that officials aren't ready to withdraw emergency stimulus just yet. King told reporters yesterday that "even if we get significant positive growth rates in the future, we have a long way to go to get back to where we were."

The Deputy Governor Charles Bean also joined the chorus of pessimism, as he claimed the credit is still tight and there are signs that some companies are turning away orders because of a lack of credit. The Pound plunged and bonds rose, after King unveiled the quarterly forecasts that the UK faces a "prolonged period of balance sheet adjustment."

The UK currency came under additional selling pressure, after King also stated that "we have a completely open mind as to whether to do more asset purchases or not." The Pound dropped as much as 0.8% to a low of $1.6619 against the U.S Dollar, amid speculation of further quantitative easing beyond the current £200 billion.

Colin Ellis, an economist at Daiwa Securities SMBC, said that "it was very important that he did not rule out further asset purchases. That could suggest one or two people wanted to do more last week. The bank's been surprised on the downside several times on the recession. King's very conscious he doesn't want to rule out further action."

The Central Bank also confirmed that inflation will remain below the government's 2% target for the majority of the next three years, before edging slightly above that level. The inflation rate dropped to 1.1% in September, the lowest level in five years, as the recession purged cost pressures within the economy.

King reiterated that he is comfortable with the Pound's 27% decline against a basket of currencies over the past two years. A weaker currency will boost export demand and help the economy shift away from domestic spending, particularly considering unemployment is currently at the highest level in 12-years, and lending conditions remain constrained.

Henrik Gullberg, a strategist at Deutsche Bank AG, said that "it's not very good news for sterling that King reiterated that a weak Pound is good for the UK economy. The focus is still very much on the uncertainties surrounding growth so the bank isn't yet ready to say to the market that it's finished with quantitative easing."

Investors have turned pessimistic about the Pound for the first time since April on the view that the Bank of England will keep interest rates on hold until the second half of 2010. The UK currency rallied to a three month high against the U.S Dollar, amid speculation that the BoE will be among the first to shift away from ultra loose policy measures.

Mervyn King also addressed the UK budget position, a day after Fitch Ratings said that the nation's sovereign credit rating is most at risk among the top rated economies. Britain last month reported the biggest budget deficit for any September since records began in 1993, as the recession ravaged tax revenue and drove up welfare costs.

The Pound rallied earlier in the day, after a report from the Office of National Statistics said that claims for jobless benefits rose by 12,900 in October, the slowest rate since April 2008, and less than the 20,000 expected. Economists expect unemployment to keep rising long after the economy returns to growth, casting considerable doubt over the strength of the recovery.


EUR/USD

The Dollar declined to the lowest level in 15-months against the currencies of major U.S trading partners, as signs of a global economic recovery spurred demand for higher-yielding currencies. Antje Praefcke, a foreign exchange strategist at Commerzbank AG, said that "we see the dollar weighed by the very low interest rates and used as a funding currency. For the moment, the Dollar will remain under pressure."

The U.S currency weakened a further 0.2% against the Euro yesterday to $1.5018 in New York and the increase in risk appetite, coupled with interest rate expectations, means that the Dollar is unlikely to find buying support in the near-term. U.S stocks extended a global advance, sending the S&P 500 Index to a 13-month high, while commodities rallied as gold jumped to a record level.

Federal Reserve officials have said that the U.S economy will be slow to recover from the steepest recession since the Great Depression, as rising unemployment curbs consumer spending and delays an economic revival. San Francisco Fed Bank President Janet Yellen raised the prospect of a "jobless recovery", while Dennis Lockhart, who heads the Atlanta Fed predicted a " relatively subdued pace of growth" this quarter.


Data Released 12th November

EU 09:00 ECB Monthly Bulletin Published

EU 10:00 Industrial Production (September)

U.S 13:30 Initial Jobless Claims (w/e 7th Nov)

U.S 19:00 Fed Budget (October)


written by Adam Solomon

Labels: daily-insight