GBPEUR/GBPUSD

The Pound declined to the lowest level in a month against the Euro yesterday, while the UK currency also lost 1.2% in value versus the U.S Dollar, after UK stocks declined and encouraged investors to seek the security of safe haven assets. The FTSE 100 index plunged 2.7% in London and headed for its steepest drop since May 21st.

The London Stock Exchange Group Plc, whose largest shareholder is Borse Dubai Ltd dropped by the most in eight months, after a proposal by Dubai to delay debt payments triggered the biggest sovereign default since 2001. HSBC Holdings Plc, a lender to Dubai World, led a retreat among banking shares, while technical problems halted trading in London for more than three hours yesterday.

David Buik, a markets analyst at BGC Partners, said "certainly the Dubai debacle and the uncertainty that is has created has had a severe knock-on effect on European equity markets. This is not the end of the world for Dubai but it is a hammer blow." The cost of protecting government notes from Qatar and Saudi Arabia rose by the most since June, as Dubai World, with $59 billion of liabilities, sought a "standstill" agreement from creditors.

Dubai borrowed $80 billion in a four year construction boom that reduced its reliance on falling oil supplies and created the region's tourism and financial hub. HSBC Holdings Plc declined 5.3% yesterday, while the FTSE 350 Banks Index plummeted 5.8% to record the steepest decline since May. Dubai's world lenders include Lloyds Banking Group Plc, Royal Bank of Scotland Group Plc and Barclays Plc.

The aggressive swings in risk sentiment continue to be the driving force in financial markets and the Pound is under pressure as equities slide. The UK currency may continue to decline against risk sensitive currencies like the Dollar and the Japanese Yen. The Pound also came under pressure yesterday, after Bank of England policy maker Andrew Sentence said that it's "premature at the moment" to discuss raising interest rates.

Sean Maloney, a fixed-income strategist at Nomura International Plc, said "there has been a bit of de-risking. The Dubai story has also weighed on the mindset of investors." Elsewhere, Ian Stannard, a senior currency strategist at BNP Paribas SA, said "there are concerns with regard the extent of the UK banking sector exposure in Dubai so that is weighing on Sterling. The underlying picture for Sterling was already fundamentally weak and this news adds to the negative picture."

Stannard also added that the Pound could fall to $1.57 over the coming weeks and Dollar buyers would be well placed to take advantage of the current rate, after 1% drop in the UK currency yesterday. The UK currency declined 0.6% against the Euro and broke through support at 1.10, despite reports from
the Confederation of British Industry, showing that an index of retail sales rose to the highest level in two years.

Retailers saying that sales rose from a year earlier significantly outnumbered those reporting declines by 13 percentage points, the highest margin since November 2007. The report from the CBI is just the latest indication that the UK economy has returned to growth in the fourth quarter, after the longest recession on record.


EUR/USD

The Dollar rallied against 14 out of the 16 most actively traded currencies yesterday, after Dubai's attempt to reschedule its debt encouraged investors to seek the security of so-called safe haven assets. The U.S currency remained largely unchanged against the Euro, gaining towards $1.5020 in New York, from a low of $1.5144 on Wednesday, the weakest level since August 2008.

The FOMC minutes from the November meeting were released on Wednesday evening and showed that Fed officials believe that the Dollar's decline has been "orderly" and they would watch for any signs that the depreciation in the U.S currency is pushing up inflation expectations. Geoffrey Yu, a currency strategist at UBS AG, said yesterday that "markets took it as the Fed gave a green light to sell the Dollar. At the same time, it seems that all central banks are sounding a bit more positive."

The Dollar declined heavily against the Euro and other higher-yielding assets, including the Australian Dollar, but the U.S currency stemmed the losses yesterday, as risk aversion crept back into the market. The Euro retreated from a 15-month high amid speculation that the single currency has risen too quickly and traders adjudged the move as overdone.


Data Released 27th November

EU 10:00 - Business Climate (November)

EU 10:00 - Economic Sentiment (November) - Industrial / Services / Consumer


written by Adam Solomon

Labels: daily-insight