GBPEUR/GBPUSD

The Pound continued to decline against the Euro yesterday, while the UK currency also traded lower versus the U.S Dollar, after the Bank of England governor Mervyn King delivered his statement to the UK Treasury Select Committee. In a written report, King told lawmakers that the Pound's depreciation is helping boost economic demand, alongside other factors such as additional stimulus measures.

The UK currency is poised to record its longest run of losses in more than two months against the Euro, as King regurgitated the same pessimistic outlook on the UK economy that he and his colleagues have been spouting for some time. He said that the economy faces "profound challenges", fueling speculation that the bank may extend quantitative easing beyond the current level.

King also said that the Bank of England would take at least two years to raise interest rates and sell bonds bought in emergency aid for the economy. He told Parliament's Treasury Committee that "we would, over a period of two to three years, engage in both kinds of actions. The difficult judgment, which is the overriding problem, is to know by how much and when to do it."

The minutes from the Central Bank's last policy meeting showed that the nine-member monetary policy committee was split three ways in the decision to extend bond purchases to £200 billion. King reiterated that he has an "open mind" after further quantitative easing, after the preliminary GDP report showed an unexpected contraction in the third quarter.

The UK economy contracted 0.4% in the three months through September, putting the UK behind the U.S, Japan and Germany in exiting the deepest recession since the Second World War. King said yesterday that "you should expect pretty buoyant growth rates in the short run because the slump has been so deep. It's actually not a particularly strong recovery."

The latest quarterly projections from the Bank of England suggests that the UK will exit the recession in the fourth quarter and expand 2.2% in 2010. That compares favourably with estimates of 1.9% three months ago and the projections are based from the modal path for GDP, based on the bank maintaining £200 billion of asset purchases.

The Pound declined 0.6% against the Dollar yesterday to a low of $1.6499 in London, as UK stocks dropped, having gained the most in over a month on Monday. The benchmark FTSE 100 Index lost 0.4%, as a retreat in metal prices weighed heavily on raw-material producers. However, losses were limited after Lloyds Banking Group Plc said that it plans to raise £13.5 billion in the country's biggest rights offering.

The Pound also fell against the Dollar after the Commerce Department confirmed that the U.S economy expanded at a rate 2.8% in the third quarter, less than the government had reported in October. Ian Stannard, a senior currency strategist at BNP Paribas SA, said that "sterling is going to be extremely vulnerable in this environment of risk appetite being challenged."


EUR/USD

The Euro declined against the U.S Dollar yesterday, as the single currency failed to break through the resistance at $1.50, after U.S consumer confidence showed an unexpected increase in November. The index, which focuses on labour market and purchase plans, advanced beyond economists' predictions. Mounting concerns over the labour market may limit spending in the coming months, as unemployment rises to the highest level in 26-years.

Elsewhere, U.S house prices fell 3.8% in the third quarter, representing the smallest decline since the first quarter of 2008, as a tax credit for first time buyers increased demand. The report illustrates the rising sense of optimism in the U.S housing sector, as the government implements a number of schemes aimed at improving lending and slowing foreclosure driven price drops.

The Euro made initial gains against the majors, amid reports in Germany that business confidence increased by more than expected to the highest level in 15-months. The Ifo index showed that the economic recovery may be gathering momentum, as companies replenish inventories and rising export orders encourage companies to step up production.


Data Released 25th November

U.K 09:30 Gross Domestic Product (Revised Q3)

U.S 13:30 Personal Income / Expenditure (October) - Core PCE

U.S 13:30 Durable Goods (October)

U.S 13:30 Initial Jobless Claims (w/e 21st November)

U.S 14:55 Michigan Sentiment (November - Final)

U.S 15:00 New Home Sales (October)

U.S 19:00 FOMC Publishes Minutes of 3rd/4th November Meeting


written by Adam Solomon

Labels: daily-insight