GBPEUR/GBPUSD

The Pound declined against the Euro yesterday, plunging to the lowest level in more than a month at 1.0930, while the UK currency extended losses against 15 out of the 16 most actively traded currencies, as investor confidence waned. The escalating concerns over the financial stability in Dubai and the subsequent exposure for UK banks saw stock market tumble worldwide.

UK stocks fell as Morgan Stanley analysts said that British banks may be "most impacted" by the repercussions of Dubai's debt payment restructuring. The benchmark FTSE 100 Index dropped a further 0.7% in London, led by Royal Bank of Scotland Plc, and UK stocks have gained just 3.2% this month, after a 2.9% decline since November 25th.

Dubai World, the investment company burdened by $59 billion of liabilities, will ask all creditors for a "standstill" agreement as it negotiates to extend maturities. Moody's Investors Service said that it would consider the plan a default should bondholders be forced to accept the terms. Dubai borrowed $80 billion to fund an economic boom and diversify its economy but the global credit crisis has hurt companies like Dubai World, as they struggled to raise loans.

Dubai may lose its status as the financial hub in the United Arab Emirates in return for a rescue package from its oil rich neighbors Abu Dhabi. The proposed bailout would mean eliminating financially unviable parts of the competing, state run companies, which lie at the root of the region's $80 billion debt.

British lenders including HSBC Holdings Plc and Standard Chartered Plc have roughly $50 billion invested in the U.A.E. Banking shares continued to slide yesterday, as Lloyds Banking Group Plc lost 5.3% and the subsequent increase in risk aversion has weighed heavily on the Pound, as investors flock to the relative security of the Dollar and the Japanese Yen.

The Pound also came under renewed selling pressure, after the Gfk consumer confidence data showed that sentiment dropped for the first time in 10-months. The UK currency slumped to a low of 1.6298 versus the U.S Dollar, before bouncing back later in the session, even as the Bank of England reported that mortgage approvals rose to the highest level in 18-months.

The report from Hometrack Ltd showed that the average cost of a home in Britain advanced 0.2% this month, the same pace as in October. Lenders granted 57,345 mortgages, compared with 56,205 in September, as the UK economy starts to emerge from the worst recession since the Second World War.

The Governor of the Bank of England Mervyn King said last week that the economy's recovery from the recession isn't "particularly strong", leading to speculation that policy makers will extend the quantitative easing policy beyond £200 billion. Rising unemployment will probably curtail growth in the housing market, while a fundamental lack of supply has been underpinning values.

King's comments over the past month have been almost tailor-made in weakening the Pound and the BoE have confirmed on numerous occasions that a weaker currency is helpful in terms of an economic recovery. He told lawmakers on November 24th that the UK faces "profound challenges" and that additional stimulus can't be ruled out.

Hans-Guenter Redeker, head of global currency strategy at BNP Paribas SA, said that "we saw consumer confidence declining for the first time since January, which is an important event, and it looks like house price increases are flattening out." The Pound fell to the lowest level since October 26th against the Euro and looks poised to extend those losses over the coming week.

Redeker also commented on the UK's exposure in Dubai and said that the struggling Gulf state may have larger asset holdings in the UK than in other countries. "Dubai has significant holdings in UK real estate and the share market. These holdings will create a sterling negative cash flow when sold off."

Analysts at Commerzbank AG also said that the Pound may continue to decline against the Euro, citing technical indicators. The Euro cleared its 55-day moving average, recent highs and so-called Fibonacci retracement resistance at 1.1136 last week. Karen Jones, head of currency technical analysis, said "we look for further gains towards 1.0822. Should the Euro break above 1.0822, we target a move towards 1.0537 over the next one to three weeks."


EUR/USD

The Dollar declined for the first time in three days against the Euro yesterday, as the United Arab Emirates' central bank said that it "stands behind" local and foreign banks. The Euro also gained some momentum, amid reports that European consumer prices increased for the first time in seven months in November, led by a surge in energy costs.

Consumer prices rose 0.6% year-on-year in October, more than initial forecasts, as commodity prices continue to rise, stoking inflationary pressures. The European Central Bank has signaled that it sees "moderate" inflation and is in no particular rush to withdraw emergency stimulus measures but yesterday's report may rekindle speculation over an interest rate hike.

The Dollar declined amid an increase in risk appetite, as U.S stocks advanced after the U.A.E pledged to back Dubai's banks and ease the debt crisis. U.S business activity also unexpectedly accelerated this month and the Dollar weakened 0.2% to $1.5021 versus the Euro, extending its monthly drop to 1.6%.


Data Released 1st December

U.K 07:00 Nationwide House Prices (November)

U.K 09:28 CIPS Manufacturing PMI (November)

EU 08:58 Markit Manufacturing PMI (November)

EU 10:00 Unemployment (October)

GER 09:00 Unemployment (October)

U.S 15:00 Construction Spending (October)

U.S 15:00 ISM Manufacturing (November)

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


written by Adam Solomon

Labels: daily-insight