GBPEUR/GBPUSD

Following on from last week, the Pound weakened against all of the 16 most actively traded currencies on Wednesday, 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 that 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 Fed chairman Ben Bernanke has committed to scale down the purchase of mortgage backed securities in the first quarter of 2010. The ECB Chairman Jean-Claude Trichet has signaled that some of the long-term financing auctions will end next month. Australia and Norway have already started raising interest rates but yesterday's report from the Bank of England means that policy makers are unlikely to shift to a tightening bias before the third quarter of next year.

Policy makers must weigh up the risk of withdrawing emergency stimulus too soon will push the economy back into recession, while the danger that ultra loose monetary policy might spark asset price bubbles. King's stance suggests that he is reluctant to follow the Fed and the ECB in signaling that an end to emergency measures is close.

The Pound rallied strongly against the Euro on Friday, breaching 1.1200 in London, as a planned merger of British Airways Plc and Iberia Lineas Aereas de Espana SA sent UK stockd higher and spurred speculation that the economy is improving. After a turbulent week, the UK currency recorded its third weekly gain against the U.S Dollar, the longest stretch since July.

Stuart Bennett, an analyst at Calyon, said that the BA agreement "puts the idea of mergers back on the agenda. This is coming to the forefront of curreny traders' imaginations. As the economy improves these deals will start coming to the table more and more." The Pound rose 0.6% against the Dollar to a high of $1.6700 and climbed 0.4% versus the Euro. The Pound's resolve will be tested this week, amid the release of the minutes from the BoE's last policy meeting.


EUR/USD

The Dollar declined against the majority of the 16 most actively traded currencies on Friday, amid speculation that the global economic recovery is gathering momentum, encouraging demand for higher-yielding assets. The U.S currency traded at $1.4832 against the Euro in New York and many economists are anticipating a move towards $1.60 over the coming months.

Consumer confidence unexpectedly fell in November for the second successive month, as rising unemployment weighed heavily on household spending. The University of Michigan's preliminary index of consumer sentiment decreased to a reading of 66 from 70.6 in October, after the jobless rate jumped to the highest level in 26-years.

Elsewhere, a report from the Commerce Department on Friday showed that the U.S trade deficit widened by 18% in September, the most in a decade, reflecting rising demand for imported oil as the economy rebounded. The trade gap grew to $36.5 billion, larger than anticipated and the highest level since January.

The Euro-zone economy emerged from its worst recession since the Second World War in the third quarter, as exports from Germany and France helped compensate for households' reluctance to increase consumer spending. Gross domestic product rose 0.4% in the three months through September, less than anticipated, and the Euro subsequently weakened against the Pound.


Data Released 16th November

U.K 00:01 Rightmove House Prices (November)

EU 10:00 Final HICP (October)

U.S 13:30 NY Fed - Empire State Index (November)

U.S 13:30 Retail Sales (October)

U.S 15:00 Business Inventories (September)


written by Adam Solomon

Labels: daily-insight