GBPEUR/GBPUSD

The Pound declined for a third straight day against the U.S Dollar yesterday, while the UK currency also fell to a low of 1.1170 versus the Euro, amid speculation that UK banks will disclose more credit losses. The Daily Telegraph reported yesterday that UK lenders are in a worst state than those abroad, citing credit-checking company Experian Plc.

The Chief Executive Officer Don Robert said that he is "not convinced defaults have yet peaked" and the Pound subsequently fell 0.7% against the Dollar to a low of $1.6630. Elsewhere, the UK budget deficit in October was the worst for the month since records began in 1993, as the recession wiped out tax revenue and welfare costs surged.

The report from the Office of National Statistics showed that the shortfall of £11.4 billion compared to a deficit of just £130 million a year earlier. The median forecast was for a £7 billion deficit and the record amount comes in a month when the Treasury benefits from quarterly payments of taxes on company profits.

The government is trying to stir up support, ahead of next year's general election, by reducing borrowing without cutting key services. Britain faces tax increases and the steepest spending cuts since the country sought an International Monetary Fund bailout in 1976. A cash method of accounting, known as the public sector net cash requirement, showed that the deficit widened to £5.9 billion, from a surplus of £2.5 billion last year.

Gordon Brown is counting on an economic recovery to help narrow the budget deficit, as concerns grow over the mounting UK debt position. The Bank of England's latest projections show that the economy will probably exit the deepest recession on record in the fourth quarter of 2009. Including the liabilities of banks now controlled by the government, Britain had £829.7 billion of debt in October, roughly 59% of gross domestic product.

The Organisation for Economic Cooperation and Development said yesterday that the Bank of England should keep the benchmark interest rate at a record low of 0.5% until 2011 to ensure the economy's recovery. The group said that the pick-up "will be slow" because of "strong headwinds from balance sheet adjustments, a still weakening labour market and fiscal tightening."

The comments contrast with investor expectations of a 50 basis point increase in the third quarter of 2010, which the Bank of England factored into its forecasts last week. The OECD also said that expanding the asset purchase plan "could help the recovery, but its effectiveness remains uncertain. A credible exit strategy needs to be developed now to facilitate a smooth withdrawal of support, once the recovery is established."

Jeremy Stretch, a senior currency strategist at Rabobank International, said that "there are ongoing concerns about the state of the banking sector in the UK and that is weighing on Sterling." The Pound declined 0.2% in value against the Euro yesterday, as losses at banks exacerbated the UK's widening budget deficit.

The Pound fell on Wednesday against the Euro and the Dollar, after the minutes from this month's central bank meeting showed that policy makers were split three ways on whether to extend asset purchases and discussed cutting the deposit rate on reserves. The MPC is divided between those who favour more aggressive action and others who believe that stimulus measures are succeeding.

EUR/USD

The Dollar strengthened against the Euro, as global stock markets retreated and diminished demand for higher-yielding currencies. Daragh Maher, deputy head of global foreign exchange strategy at Calyon, said "it's a risk-off day. Equity markets are down, and in that kind of environment the Dollar and the Yen get bid"

U.S initial jobless claims were unchanged at 505,000 in the week ending November 14th, while regional data showed that manufacturing in the Philadelphia region expanded at the fastest pace in more than two years. Rising foreign demand and a record decline in inventories are giving factories the incentive to step up assembly lines, while a rebound in manufacturing has helped the economy emerge from the worst recession since the Great Depression.

Elsewhere, the U.S Treasury Secretary Timothy Geithner said that he expects the U.S economic recovery will extend into next year and called on Congress to pass legislation intended to prevent another financial crisis. The Dollar also gained versus the Euro, amid speculation that traders trimmed short positions, after the U.S currency failed to weaken beyond $1.50 per Euro.

Data Released 20th November

GER 07:00 - Producer Price Index (October)


written by Adam Solomon

Labels: daily-insight