The Pound rallies against the Dollar, amid a global increase in risk appetite
GBPEUR/GBPUSD
The Pound declined heavily against the higher-yielding currencies, as an element of confidence returned to financial markets, despite widespread concerns over the spread of swine flu. The UK currency rallied to a high of $1.4812 against the U.S Dollar, as the rise in risk appetite diminished the allure of U.S assets as a haven.
UK stocks advanced, led by a rebound in banking shares and metal producers, after HSBC Holdings plc recommended Barclays Plc and Lloyds Banking Group Plc. The FTSE 100 Index jumped 2.3% on the session, as Barclays, the U.K’s third-largest bank, and Lloyds allied over 8% to wipe out two consecutive days of declines.
The UK benchmark index has rebounded 19% from its low this year on March 3rd, amid optimism that the worst of the global recession may be over. However, the FTSE is still down over 37% since June 2007, as banks in Europe reported more than $395 billion in net credit losses. Global stocks declined earlier this week on concerns that U.S lenders will need to raise additional capital and the outbreak of swine flu will hamper economic activity.
The Pound dipped to lows just under 1.1100 against the Euro yesterday and gilts rose, after the Chancellor of the Exchequer Alistair Darling said that UK interest rates would remain at record low levels. The two-year yield fell to close to its lowest level in almost four months, as Darling said in a conference to business leaders that interest rates were “low and likely to remain low”.
The Bank of England have cut UK interest rates by 4.5 percentage points since October to the lowest level in history at 0.5%. Policy makers have also embarked on a period of quantitative easing, through the creation of new money to purchase government and corporate bonds. The BoE confirmed on March 5th that it will buy up to £75 billion of toxic assets, as part of the asset insurance program.
The Pound will continue to make gains against the Dollar in the near-term as the aggressive swings in risk sentiment continue to dominate the market. The UK currency may also find some support against the Euro, amid the release of key economic data. The Gfk gauge of consumer confidence is expected to show an improvement in sentiment for April, while a separate report from Nationwide will probably report a modest increase in UK house prices.
EUR/USD
The Euro rallied above $1.3300 against the Dollar yesterday but the single currency may struggle to maintain its momentum, amid speculation that the U.S economy will recover faster than the Euro-zone. According to estimates from Commerzbank AG, the Euro’s advance may come to an abrupt end between $1.3315 and $1.3330.
European retail sales declined the least in 11-months in April, after further government stimulus packages improved consumer confidence and encouraged shoppers back to the high-street. The Purchasing Managers’ index showed that a measure of retail sales rose to a reading of 48.4, from 44.1 in March, as governments fight the worst recession since the Second World War.
Inflation has fallen below the ECB’s target of 2%, which has boosted household spending, but the impact may be limited as rising unemployment takes its toll. Retail sales in Germany have fallen at the slowest pace since May 2008, while sales have also declined at a slower pace in Italy and France.
A separate report yesterday showed that European confidence in the economic outlook increase for the first time in 11-months in April. The surprisingly upbeat tone of the report has fuelled hopes that the economy may now be past the worst of the recession but “with Euro-area domestic demand likely to remain weak, any resumption in growth may have to wait for world demand to recover.”
The European Central Bank have refused to cut interest rates as aggressively as the Bank of England the Federal Reserve. Policy makers are debating on whether to follow their counterparts in buying assets to combat the economic slump and engage in some method of quantitiative easing. The governing council committee are split on how aggressive to be at a time when interest rates are already at a record low of 1.25%.
The Dollar failed to find any support against both the Pound and the Euro, even after U.S gross domestic product plunged again in the first quarter. The economy contracted a greater-than-expected 6.1% annual pace, after contracting 6.3% in the last three months of 2008. The report from the Commerce Department reflects the worst recession in at least half a century, as inventories slumped and further declines in the housing market exacerbated the slowdown.
The Federal Reserve have refrained from increasing the purchases of Treasuries and mortgage-backed securities, saying that the economy is showing some signs of recovery. Household spending has increased but remains constrained due the escalating job losses and tighter credit conditions.
The Pound remains firm against the majors after UK retail sales rise to the highest level in 15-months
GBPEUR/GBPUSD
Good Morning,
The Pound remained largely unchanged against the Dollar yesterday, while the UK currency recorded gains against the majority of the 16-most actively traded currencies, after a report from the Confederation of British Industry showed that UK retail sales rose to the highest level in 15-months. A survey of retailers showed a net 3% reporting higher sales in April, compared with 44% saying that sales had fallen in March.
An index of retail sales rose to the highest level in more than a year, as stores overcame the recession and the rising unemployment rate. Recent economic data has indicated that the worst recession since Margaret Thatcher came to power in 1979 has started to ease, as shoppers sustained spending, even after the number of people out of work exceeded the highest level since 1997.
Andy Clarke, chairman of the CBI Distributive Trades Panel said that while the figures were encouraging, they did not mark a recovery on the high street. “With unemployment rising and growth in average earnings down, consumers remain very wary and retailers themselves think that sales will drop again in May."
The Chancellor of the Exchequer Alistair Darling said last week that he expects the UK economy to recover by the end of the year. However, the Pound was rocked amid speculation that Moody’s investors services will cut the UK’s AAA credit rating, following concerns over the state of British finances. The International Monetary Fund still expects the economy to contract this year at the fastest pace in sixty years.
The Pound held on to recent gains made against the Euro yesterday, despite a drop in the UK stock market, as speculation surrounding the global swine-flu outbreak and the implications for the global economy. Banking stocks also slid on concern they may need to shore up their balance sheets. The FTSE 100 Index decreased 1.7% on the day, as HSBC Holdings Plc lost 2%, following reports that Bank of America Corp and Citigroup Inc may be forced by regulators to raise more capital.
Global financial markets will remain nervous until there is more clarity over the threat posed by the swine flu outbreak and the high-yielding currencies have all declined against the Pound, apart from the South African Rand. The Rand also rose to the highest level against the U.S Dollar since October 3rd, on speculation the central bank will slash interest rates again this week to help fuel spending and bolster growth.
The Pound will continue to gain ground against the majority of the majors if there is an improvement in risk appetite, but there will still be very important risks associated with the escalating debt burden and volatility is likely to increase. A slightly more positive stance towards the global economy has seen the Pound test resistance levels above $1.4700 against the Dollar this morning.
EUR/USD
The overall improvement in risk sentiment also saw the Euro advance significantly against the U.S Dollar last night. The single currency found support below the $1.3000 level, but confidence recovered later in the day, amid an increase in risk appetite, which curbed demand for the Dollar. European stocks initially declined on concerns that banks may need to raise additional capital and the outbreak of swine flu will hamper an economic recovery.
Elsewhere, European Central Bank governing council member Lorenzo Bini Smaghi displayed a reluctance to cut interest rates towards zero per cent. He also said that buying government bonds would pose a problem to the Central Bank. "Bringing the main policy rate too close to zero would risk hampering the functioning of the money markets as it would reduce the incentives for interbank lending".
Although Bini Smaghi stressed that his comments were "in no way a pre-judge" to the ECB policy meeting on May 7th, the tone of his statement indicates that the committee are still split on the best way to handle the worst recession since the end of the Second World War. He did express preference for measures already implemented by the ECB, aimed at relaxing banks' collateral and funding constraints.
The Euro will remain very sensitive to policy comments ahead of the governing council meeting next week and any suggestion that the bank will not pursue quantitative easing methods would help strengthen the Euro. As global risk appetite improved, the single currency moved towards highs around $1.3200 against the Dollar, ahead of the FOMC interest rate announcement this evening.
The Dollar fell against the majority of the higher-yielding currencies, after consumer confidence in the U.S jumped by the most since 2005 in the figures for this month. The Conference Board's index of sentiment rose more than initial forecasts to a five month high, as stocks rallied, mortgage rates dropped and Americans anticipated more jobs would become available.
Elsewhere, a seperate report showed that the decline in home prices in 20 U.S cities slowed in February for the first time since 2007, with the S&P/Case Shiller index of prices posting an 18.6% decline from the same month a year previously. The Dollar remains predominantly sensitive to swings in risk sentiment, after yesterday's reports signaled that the grip of the recession is loosening.
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Today:
Pound declines against the Dollar due to the concerns of a global health emergency.
UK GDP has shrank by 1.9% in the first quarter, which is the most since Thatcher came to power in 1979.
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Please Note: Every effort is made to ensure the accuracy of the information contained within this communication, however TorFX cannot accept liability for damage caused by error, omission, or inaccuracies. This podcast is intended for general information and interest purposes only. Any opinions expressed are those of the individuals featured, and do not represent advice or inducements to trade.
The Pound declines against the Dollar, amid concerns over a swine flu pandemic
GBPEUR/GBPUSD
Following on from last week, the Pound found support around $1.4450 against the Dollar on Thursday, while the UK currency also lost ground against the majority of the 16-most actively traded currencies. Investors flocked to the security of safe haven assets like the Japanese Yen and Swiss Franc, after Moody's Investors Service said that the nation's finances are "deteriorating rapidly" and the economy shrank by the most since 1979.
The degree of risk aversion sweeping through the market saw the Yen rally to a three week high against the Dollar, as Asian stocks fell and U.S equity futures headed lower. Adam Cole, head of global foreign-exchange strategy at RBC Capital Markets in London, said that "weak data and concerns about budget conditions leading to ratings downgrades are putting pressure on the Pound."
The Pound rebounded from the 38.2% retracement level at $1.4450, to a high of $1.4722 in New York. However the UK currency has continued the downside momentum against the Euro, falling to a low of 1.1023 during the Asian session. The Nikkei 225 stock average fell 1.6% over night, amid speculation that the global recession will continue to delay a recovery in the world economy.
The Chancellor of the Exchequer Alistair Darling delivered his annual budget last Wednesday and the Pound declined following the statement, which seemed to indicate an overly optimistic view that the economy would recover at the end of the year. The UK government's balance sheet is worsening due to weakening tax revenues and the effect of its bank bailouts.
Moody's and Standard & Poor's are currently reviewing the UK's AAA sovereign credit rating, after the government said that the nation's debt will reach £1.4 trillion over the next five years. An article in the Daily Telegraph said that Moody's analysts are scrutinising the details of the budget and said that the Treasury's projections are "a cause for concern."
Sean Callow, senior currency strategist at Westpac Banking Corp said that "its a veiled threat from Moody's. Given that we are still above where we were 24-hours ago you would hardly be shocked if the Pound headed back to the low 1.45s against the Dollar."
The tone of the article is weighing on the Pound, particularly against the Euro, as the financial turmoil fueled borrowing costs and swelled the budget deficit to a record level. The UK currency is under considerable pressure against the single currency and may fall below 1.1000 over the coming weeks. The Pound depreciated 1.1% against the Euro on Friday, after touching the weakest level since April 9th.
The UK economy shrank 1.9% in the first quarter, the biggest contraction since Margaret Thatcher came to power in 1979. Gross domestic product fell 1.6% in the previous three months, indicating that the recession is showing few signs of abating, after manufacturing and service industries recorded sharp declines.
The economic slump may turn out to be the worst recession since the 1930s, prompting the government to say last week that the budget deficit could swell to a record level, casting doubt on the nation's credit rating. The Bank of England argues that the slump in the economy may be easing, as they print money to stave off the threat of deflation and keep interest rates at a record low.
The Pound lost 26% versus the Dollar and 12% against the Euro over the past year and the weekly dollar-pound exchange rate has averaged about $1.67 over the past 20-years. That's 14% higher than the current price, leading some analysts to conclude Sterling is undervalued.
Roddy Macpherson, an investment director at Scottish Widows Investment Partnership Ltd, said "we think the Pound will be the strongest currency over the next 12-months. The recovery of the UK economy will take place in the first half of next year, and the central bank will start to tighten" monetary policy.
In terms of economic data, the Pound may find some respite this week, following the negative market reaction to Darling's budget and plans to dramatically increase public sector borrowing. The CBI distributive trades survey for April, along with consumer confidence data and manufacturing reports for the same month are all expected to show a modest improvement.
EUR/USD
The U.S Dollar and Japanese Yen have gained ground against the majors over the weekend, as concerns returned to global financial markets, regarding the spread of swine flu that has already killed 103 people in Mexico. Stocks declined around the world, Treasuries gains and safe haven currencies benefited, as the swine flu outbreak also spread to the U.S and Canada.
The U.S government declared a "public health emergency of international concern" that could potentially become a global outbreak of serious disease. The Dollar gained almost 1% against the Pound and the Euro overnight, as concern about the global epidemic became more intense. The subsequent degree of risk aversion also saw risk sensitive currencies like the Australian and New Zealand Dollar decline, with further selling pressure anticipated throughout the course of the day.
Concerns over a global pandemic will continue to overshadow markets for the time being, with the safe haven currencies benefiting the most. In terms of economic data, the focus this week will fall on the advanced estimates of U.S gross domestic product in the first quarter. The report is expected to show that the economy is contracting at an annual rate of 5%.
Elsewhere, the Federal Reserve's Open Market Committee are set to convene this week and with interest rates already at ultra low levels, its thoughts will be on the U.S economy. There is also plenty of market moving data in the Euro-zone, with a host of key data due for release. The EC activity indices are expected to remain at depressed levels, while the flash estimate of consumer prices may show that inflationary pressures have subsided.
The foreign exchange outlook podcast from TorFX. Bringing you up to the minute currency market news.
You can download the podcast directly from here, subscribe to the blog here or if you have iTunes installed click here.If you have any questions or comments about this Podcast please leave a comment below or call TorFX now on 0800 612 9625.
Please Note: Every effort is made to ensure the accuracy of the information contained within this communication, however TorFX cannot accept liability for damage caused by error, omission, or inaccuracies. This podcast is intended for general information and interest purposes only. Any opinions expressed are those of the individuals featured, and do not represent advice or inducements to trade.
The Pound declines against the Euro, amid threats that the nation's AAA credit rating will be slashed
GBPEUR/GBPUSD
The Pound found support around $1.4450 against the Dollar yesterday, while the UK currency also lost ground against the Japanese Yen. Investors flocked to the security of safe haven assets, after Moody's Investors Service said that the nation's finances are "deteriorating rapidly" and the government are taking "risks."
The degree of risk aversion sweeping through the market saw the Yen rally to a three week high against the Dollar, as Asian stocks fell and U.S equity futures headed lower. Sean Callow, senior currency strategist at Westpac Banking Corp said that "its a veiled threat from Moody's. Given that we are still above where we were 24-hours ago you would hardly be shocked if the Pound headed back to the low 1.45s against the Dollar."
The Pound rebounded from the 38.2% retracement level at $1.4450, to a high of $1.4722 in New York yesterday. However the UK currency has continued the downside momentum against the Euro, falling to a low of 1.1023 during the Asian session. The Nokkei 225 stock average fell 1.6% over night, amid speculation that the global recession will continue to delay a recovery in the world economy.
The Chancellor of the Exchequer Alistair Darling delivered his annual budget on Wednesday and the Pound declined following the statement, which seemed to indicate an overly optimistic view that the economy would recover at the end of the year. The UK government's balance sheet is worsening due to weakening tax revenues and the effect of its bank bailouts.
Moody's and Standard & Poor's are currently reviewing the UK's AAA sovereign credit rating, after the government said that the nation's debt will reach £1.4 trillion over the next five years. An article in the Daily Telegraph said that Moody's analysts are scrutinising the details of the budget and said that the Treasury's projections are " a cause for concern."
The tone of the article is weighing on the Pound, particularly against the Euro, as the financial turmoil fueled borrowing costs and swelled the budget deficit to a record level. The UK currency is under considerable pressure against the single currency and may fall below 1.1000 over the coming weeks.
The UK economy has contracted more than economists forecast in the first quarter, the most since Margaret Thatcher came to power in 1979. Gross domestic product fell 1.9% from the final three months of 2008, as manufacturing and business services recorded record declines.
The report from the Official of National Statistics has poured scorn on speculation that the recession is abating, as UK business services shrank 1.8%, the most since the series was compiled in 1983. Manufacturing also contracted 6.2%, the most since at least 1948.
The government this week said that the steepest recession since the Second World War will push the budget deficit to a record level but the Bank of England have argued that the recession may be easing, as they print money to ward off the threat of deflation.
The UK is the first of the Group of Seven nations to report first quarter GDP, as finance ministers prepare to meet in Washington today, to discuss unemployment, deflation and toxic bank assets. The is the first time gross domestic product has contracted by more than 1% for two consecutive quarters, since modern records began after the Second World War.
EUR/USD
The Euro extended this week's advance against the Dollar, rising back above $1.3200 last night, after a report showed that business confidence in Germany rebounded in April, from the lowest level in 26-years. The optimistic tone of the report has increased speculation that the worst of Europe's economic slump may be over.
The Ifo Institute in Munich said that it's business climate index increased to a reading of 83.7, from 82.2 in March. The result was way in excess of initial forecasts and the recent tone of economic data has raised hopes that the Euro-zone recession is waning. The Euro also made gains yesterday, after Credit Suisse Group AG said that it returned profit in the first quarter, while an index of European services and factory industries shrank at the slowest pace in six months.
The Dollar declined against the majors on Thursday, as the tone of U.S economic data was slightly weaker. Initial jobless claims increased 640,000 in the past week, from a revised 613,000 previously. The report dampened hopes that the labour market had improved, while existing home sales slowed to an annual rate of 4.57 million in March, from 4.71 the previous month.
The Pound declines against the majors, after the UK budget deficit swells to £170 billion
The Pound declined heavily against the majors yesterday, falling through a number of key support levels to a low of $1.4399 against the Dollar, ahead of UK economic data releases and the budget presentation. The UK currency also registered sharp losses versus the Euro, falling to a low of 1.1120, after the Treasury said that it will sell a record amount of gilts this year, in a effort to lift the economy out of the worst recession since the Second World War.
The London-based Debt Management Office said it plans to raise £220 billion from gilt sales in the year through March 2010, significantly higher than the £180 billion expected. The Pound also lost ground against the Yen and Swiss Franc, as the announcement encouraged investors to sell out of high-yielding currencies and seek the security of safe havens.
The Chancellor of the Exchequer Alistair Darling presented his annual budget to Parliament yesterday and predicted that the UK economy will contract 3.5% this year. Darling announced a larger-than-expected budget deficit of £175 billion for the fiscal year starting in April with only a marginal decline the following year.
In the aftermath of Darling's growth forecasts, the International Monetary Fund predicted that the UK economy will contract 4.1% this year, with the recession continuing in 2010. According to a separate report from Citigroup Inc, this year's shortfall of 12.4% of GDP will be the biggest peacetime deficit in more than a century.
Darling said that the recession will be the worst since the Second World War. The Treasury will borrow £269 billion, more than estimated in November, and will raise taxes by £3.2 billion on people earning above £100,000 a year. Tax increases were also announced for the following year to help trim the deficit, raising a further £6 billion through duties on alcohol, tobacco and fuel.
People earning in excess of £150,000 a year will pay 50% of their income in tax and lose tax breaks for pension contributions. The new rate is five points higher than anticipated in November and will unravel Margaret Thatcher's Conservative budget in 1988, which eliminated all tax rates over 40%. The UK financial services industry will probably lose 140,000 jobs this year, while 25,000 of the richest taxpayers may flee the country.
Borrowing at this level would represent 12% of UK gross domestic product and this is on the basis that the economy will begin to stabilise before the end of the year, which is more optimistic that private forecasts from the International Monetary Fund. In addition, borrowing at these levels gives the government little room to stimulate the economy before the next General Election in 2010 and remains a very important risk factor for Sterling.
The announcement yesterday triggered a sharp decline in the Pound and the deficit is certainly at a level that could spell a sustained downward pressure on the UK currency. Darling's expectations that growth will resume at the end of the year is far too optimistic and suggests that taxes will ultimately rise again.
Paul Day, chief market analyst at MIG Investments SA in Singapore, said the "the UK is mortgaged up to the hilt. Sterling is way off its lows against many currencies...the risk is that we'll take those lows out over the next couple of months." Therefore, Euro and Dollar buyers may wish to take advantage of the current rate, as the downside pressures surrounding the Pound continue to pile up.
The UK currency slid earlier in the day after a separate report from the International Labour Organisation showed that the number of people out of work rose to 2.1 million in the last quarter, the most in 12-years. The unemployment rate increased to 6.7%, the highest since October 1997, from 6.5% in the quarter through January.
The report from the Office of National Statistics showed that claims for jobless benefits rose 73,700 in March to 1.46 million, which was significantly less than the 116,000 anticipated. Darling pledged help for the unemployed in the budget yesterday, as the recession forced companies to cut production and axe jobs.
EUR/USD
The Euro declined to lows below $1.2900 against the Dollar yesterday, but the U.S currency was unable take full advantage and failed to challenge significant technical levels. U.S stocks rallied, diminishing the allure of the Dollar as a haven, while house prices rose 0.7% in February to record the first consecutive gain in the U.S for two years.
The report provides some optimism that near-zero interest rates may be moderating the decline in property values. Prices fell 6.5% in February from a year earlier, the second smallest drop in six months. Mortgage rates have tumbled 1.6 percentage points in the past six months, making homes more affordable.
The tentative swings in risk sentiment are likely to continue in the short-term, as fears over non-performing loans in the consumer credit sector will see traders maintain a generally cautious attitude towards risk, curbing any prolonged Dollar selling. The focus today in terms of economic data will fall on the U.S jobless claims. Confidence in the prospects of an economy recovery will be sustained if there is a further decline in jobless claims and a rise in existing home sales.
GBP/USD GBP/EUR
Data Released 23rd April
U.K 11:00 CBI Industrial Orders (April)
EU 08:58 Flash PMI - Composite
- Manufacturing
- Services
EU 09:00 Current Account (February)
EU 10:00 Industrial Orders (February)
U.S 13:30 Initial Jobless Claims (w/e 18th April 2009)
The Pound rebounds against the majors, after falling to a low of $1.4472
GBP/USD GBP/EUR
The Pound found some support below $1.4500 against the Dollar, rebounding from its lowest level in three weeks, while the UK currency also rallied back towards 1.1300 versus the Euro. UK stocks continued to slide, led by declines in banking shares, but quarterly results from Tesco Plc and Burberry Group Plc increased speculation that the economic slump may be easing.
The benchmark FTSE 100 Index lost just 0.1% to 3,987.46 in London, after earlier falling as much as 2.4%, following reports that earnings from Bank of New York Mellon Corp sparked a sell off in banks, offsetting a rally in consumer-related companies. Shares in Barclays Plc and Lloyds Banking Group Plc both retreated after the report.
The FTSE 100 has gained 14% from its lowest point this year, amid increasing optimism that the worst of the recession may be over. Almost $1.3 trillion in banking losses worldwide since the start of 2007 has dragged the UK benchmark index down 48%.
The correlation between the performance of the Pound and the volatility in equity markets has become increasingly prevalent over the past year. Since hitting a high of $1.5068 against the Dollar last week, the Pound has fallen to a low of $1.4472, as a degree of risk aversion crept back in to the market and encouraged investors to seek the security of U.S denominated assets.
The Pound swung between gains and losses against the Euro yesterday, after a report from the Office of National Statistics showed that UK consumer price inflation dropped to the lowest level in a year. The worst recession in a generation has blunted price pressures across the economy, as consumer prices rose just 2.9% from a year earlier
The result matched the median forecast but the retail price index annual gauge dropped for the first time since 1960. Energy costs have plummeted and retailers have reported slower sales, as Tesco Plc, Europe's second largest retailer, said yesterday that profit growth was the slowest in 15-years. Price cutting by rival companies has eroded their market share, as consumers cut back on spending, amid fears over job security.
George Buckley, chief UK economist at Deutsche Bank AG in London, said yesterday that "we are going to get below 1% inflation by September", which may undermine confidence in the economy in the second half of the year and stoke deflationary concerns. The Bank of England forecasts that inflation will slow to 0.3% by 2011, well below the government's 2% target, and a recent report showed that UK producer prices rose at the slowest annual pace in March for almost two years.
The Governor of the Bank of England Mervyn King wrote a letter of explanation to the Chancellor, as to why inflation had breached the 3% upper limit in February and said that a "sharp decline" in the rate is likely to resume. Although it may remain "volatile" because of the weakness in Sterling, which makes imports more expensive.
The retail price index measure of the report showed a 0.4% annual price drop in March to record the first annual decline in nearly half a century. The Bank of England have cut interest rates to a record low of 0.5% and embarked on a policy of quantitative easing, through the purchase of government bonds with newly created money.
The Confederation of British Industry predicted earlier this week that the UK economy will contract 3.9% this year, curbing tax revenue and pushing the budget deficit to 11.2% of gross domestic product. The Chancellor Alistair Darling will deliver his budget statement at midday today and is expected to refrain from announcing any additional fiscal stimulus measures.
Darling is expected to spell out plans to rein in the UK fiscal deficit, outlining measures to improve government efficiency and slow government spending. The cost-cutting will form part of a broader effort to rebuild credibility in the handling of the economy and boost Labour support in the polls.
The budget will also offer short-term relief to the unemployed and provide incentives to spur new industries. The government is seeking to fend off criticism of economic mismanagement from economists and opposition leaders, after injecting hundreds of billions of Pounds to shore up the banking sector.
The budget deficit will be £160 billion in the fiscal year ending in March 2010 and a projected £167,000 billion the following year, according to a median of estimates carried out by the Treasury. That's significantly higher than the £118 billion that Darling predicted in December and economists have urged the Chancellor to hold back on any new fiscal support, giving more time for previous measures to work.
In terms of economic data, the Pound may come under further selling pressure this morning, as UK unemployment data may show that jobless benefits claims jumped to the highest level since 1997. Claims probably increased to 116,000 in March, while the Pound may also be susceptible to the tone of the minutes from the Bank of England's last policy meeting.
There were mixed comments from MPC member Fisher yesterday, who indicated that policy makers would need to discuss whether the quantitative easing program would need to be expanded. Any move to increase the rate of bond purchases would tend to undermine Sterling.
EUR/USD
The Euro found some support below $1.2900 against the Dollar on Tuesday and attempted a rally during the day. German investor confidence rose to the highest level in almost two years in April, after global stocks rallied on government and Central Bank efforts to revive economic growth. The ZEW Centre for European Economic Research said that its index of investor and analyst expectations rose to the highest level since June 2007 and recorded the first positive reading since July of that year.
European stocks last week posted their sixth consecutive weekly advance, amid speculation that the worst of the recession may be over. The German Chancellor Angela Merkel's coalition government will spend about €80 billion to the stem the country's worst recession in over sixty years and the ECB has signaled that it will cut interest rates to a new record low in May.
The Dollar declined against almost all of the 16-most actively traded currencies yesterday, after the Treasury Secretary Timothy Geithner said that the "vast majority" of U.S banks have sufficient capital. His comments reduced the allure of the Dollar as a safe haven and the U.S currency declined more than 1% against the higher-yielding currencies.
The Pound declines against the majors, as banking shares tumble
GBP/USD GBP/EUR
The Pound was unable to make any headway during Asian trading on Monday and slumped to the lowest level in six weeks against the U.S Dollar. The UK currency also suffered a sharp intraday loss against a basket of currencies, as banking shares tumbled and a report from the Confederation of British Industry predicted that the economy will contract by more than initially anticipated.
The Chancellor of the Exchequer Alistair Darling has been advised to hold back on any further fiscal support to the economy and allow time for the current measures to take effect. Government debt has also increased exponentially and the report from the CBI forecasted that the UK economy will shrink by 3.9% this year.
The extent of the economic slump will exacerbate the Treasury's deficit, curb tax revenue and push the deficit to 11.2% of gross domestic product. That may limit the amount of new spending that Darling can announce in the annual budget statement on Wednesday, which the government hopes will bolster the economy and increase support ahead of the election due by the middle of 2010.
The accompanying statement from the CBI Director General Richard Lambert said that "given falling tax revenues, the shrinking economy and alarming levels of debt, we urge the chancellor to avoid any further major fiscal boosts." The suggestions from the business lobby contrast with the view of union representatives, who want the government to spend more on bailing out struggling automakers like General Motors Corp.
The political pressures surrounding the tone of the budget statement will be significant, as Darling must appeal to the electorate and convey a plan to boost the labour market. The unemployment rate has risen to the highest level since 1971, as companies cut output and shed workforces. A separate report from the Centre for Economics and Business Research said yesterday that fewer jobs will be lost in the financial services industry than previously estimated.
Roughly 29,000 jobs will be eliminated, compared with an October estimate of 34,000, while 28,000 lost their pensions last year. Nevertheless, the CBI and the CEBR both agree that the worst of the recession may be over, after a gauge of UK service sector growth rose to a six month high in March. In addition, a report from the Bank of England showed that mortgage approvals rose in February, while house prices increased for the first time since 2007.
The Pound was unable to sustain the recent upside momentum against the Euro yesterday, falling towards 1.1220 last night, despite a report from Rightmove Plc, which showed that asking prices for homes rose for a third month in April. Mortgage availability improved as banks revived lending, after the government injected hundreds of billions of pounds of support to banks, including Lloyds Plc and Royal Bank of Scotland Group Plc.
The Bank of England have cut interest rates to a record low of 0.5% and embarked on a program of creating new money to purchase government and corporate bonds in a policy known as quantitative easing. The aggressive policy easing from the BoE has put the UK ahead of the curve in terms of an economy recovery and that has seen the Pound rally to a high of 1.1368 versus the Euro.
The Pound also registered losses against the Japanese Yen and Swiss Franc, as an element of risk aversion crept back into the market, after the FTSE 350 Banks Index dropped 5.3% in London. UK stocks also slipped 2.5% yesterday, falling below the 4,000 barrier, amid speculation that the economy is still in the midst of the worst recession since 1980.
The Pound slipped to a low of $1.4501, to record the biggest daily decline since March 9th and the lowest level since April 2nd. The aggressive swings in risk sentiment and fiscal policy uncertainties will continue to be the dominant feature this week. The annual budget tomorrow is expected to have a tough tone on government spending, while trends in the global banking sector will be watched closely.
Ongoing fears surrounding the U.S sector will undermine confidence in the Pound and the degree of risk appetite will also remain very important in driving sentiment. The UK currency may find some support just under the $1.4500 level versus the Dollar and has already staged a partial correction this morning, following the sharp losses on Monday.
EUR/USD
The Dollar rallied to close to a five-week high against the Euro yesterday, amid concerns that the global financial crisis will worsen and boosted the demand for the U.S currency as a safe haven. The tentative sentiment surrounding the prospects of an economy recovery continues to drive the market and the Dollar may continue to make gains in the short-term, breaching the $1.3000 level.
The Japanese Yen also strengthened against 15 out of the 16 most actively traded currencies, as the slump in Asian stocks prompted investors to reduce holding of higher-yielding assets. Yuji Saito, head of foreign-exchange group in Tokyo at Societe Generale SA said that "renewed worries over the financial turmoil are making investors risk averse again. In this environment, the dollar and the Yen are likely to be bought as 'safe haven' currencies".
The Euro also came under further selling pressure, after the ECB chairman Jean-Claude Trichet signaled that the governing council will cut interest rates further from the current 1.25% and may pump money into the economy in a less conventional policy measure. Overall confidence in the Euro-zone economy also remained weaker, which curbed support for the single currency.
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The Pound declines against the majors ahead of the UK budget on Wednesday
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Following on from last week, the Pound dropped for a second day against the Dollar on Friday, slipping towards $1.4650 during Asian trading over the weekend, as the UK currency failed to regain the $1.5000 level. Sterling also retreated from a high at 1.1368 versus the Euro, amid pressure for a partial correction from the recent gains. The renewed optimism for an economic recovery came under scrutiny after the British Retail Consortium reported that retail sales fell in March.
Sales plunged 1.2% from a year earlier, the ninth month of declines in ten. In the first quarter of the year, they fell 0.7% as consumers reined in spending, amid tighter lending restrictions and concerns over job security. Unemployment has risen at the fastest pace since 1971, while the economy has contracted 1.6% in the latest estimates for the fourth quarter, the most in nearly 30-years.
The Bank of England have cut UK interest rates to an historic low of 0.5% and embarked on a period of quantitative easing, through the purchase of government and corporate bonds with newly created money. The Governor of the Central Bank, Mervyn King, said last week that the decline in gross domestic product will be similar for the first quarter of 2009.
The rally in equity markets failed to spark a rally in the Pound, suggesting that the UK currency may not be as susceptible to risk sentiment as it has been previously. The Pound's rally to the $1.5000 barrier for the first time in three months shows that financial markets are growing in confidence, despite the worst recession since 1984.
There has been so much bad news priced into the Pound that any indication of a recovery is giving investors enough reasons to buy. The UK currency was one of last year's worst performing currencies, declining 26% against the Dollar and 23% versus the Euro. The latest estimates show that more than 2 million workers are unemployed, while house prices slumped 17% in the past 12 months alone.
A separate report from the Commodity Futures Trading Commission showed that the Pound will fall towards $1.4500 against Dollar and back below 1.1000 versus the Euro, as traders remain cautious over the prospects of an economic recovery. Nevertheless, technical analysts, who use historic trading patterns to predict future prices, suggest the Pound will continue to advance in the short-term.
The Pound has been trading above its 100-day moving average against the Euro since April 7th, the first time that it broke through this level since November 3rd. However, the Pound may struggle to hold on to its recent gains, unless it breaks through $1.5074. The UK currency has almost reached that level on three occasions since falling to a low of $1.3505.
Sterling was also unsettled on Friday by comments from a government minister who suggested that there was no need to worry over any further decline in the currency. Uncertainty surrounding fiscal policy will continue to be the dominant feature this week, with the annual budget released on Wednesday.
The Chancellor of the Exchequer Alistair Darling is expected to spell out plans to rein in the UK fiscal deficit, outlining measures to improve government efficiency and slow government spending. The cost-cutting will form part of a broader effort to rebuild credibility in the handling of the economy and boost Labour support in the polls.
The budget will also offer short-term relief to the unemployed and provide incentives to spur new industries. The government is seeking to fend off criticism of economic mismanagement from economists and opposition leaders, after injecting hundreds of billions of Pounds to shore up the banking sector.
The budget deficit will be £160 billion in the fiscal year ending in March 2010 and a projected £167,000 billion the following year, according to a median of estimates carried out by the Treasury. That's significantly higher than the £118 billion that Darling predicted in December and economists have urged the Chancellor to hold back on any new fiscal support, giving more time for previous measures to work.
In terms of economic data, the Pound also came under further selling pressure despite reports that UK house prices rose for a third straight month in April. The average asking price for a home rose 1.8% from the previous month to £222,077, as mortgage availability improved. Approvals rose 19% in February, as the Bank of England cut interest rates to a record low of 0.5%.
EUR/USD
The Euro slumped against most of the 16 major currencies on Friday, amid speculation that policy disagreement among the region's central bankers will continue to undermine efforts to revive the economy. The single currency lost 1.1% in value against the U.S Dollar, falling through a key support level to a low of $1.3018, the lowest level since March 18th.
The European Central Bank President Jean-Claude Trichet said in a speech in Tokyo last week that policy makers must do everything possible to resurrect confidence and that uncertainty will delay a recovery in the region's economy. He said "Any ambiguity in our medium-term policy direction would delay the return of sustainable prosperity, because that would undermine confidence, which is the most precious ingredient in the present circumstances."
The Central Bank will probably lower interest rates again in May from the current 1.25% but conflicting comments from a number of policy makers indicates that the governing council are split on the best course of action to take. Axel Weber, the Bundesbank President has reiterated his desire to look at other policy tools and refrain from cutting below 1%.
His comments have put him at odds with a number of other governing council members, including George Provopoulos, while Jose Manual Gonzalez said last week that policy makers' scope for further reductions is "very moderate". The Euro subsequently decline 5% from a two month high of $1.3738 reached on March 19th, the day after the Fed announced it would buy up to $300 billion in Treasuries.
The Euro declines as ECB President Trichet says that he'll do whatever is necessary to end the crisis
GBP/USD GBP/EUR
The Pound dropped for a second day against the Dollar yesterday, slipping towards $1.4875 in London, as the UK currency failed to regain the $1.5000 level. Sterling also retreated from a high at 1.1368 versus the Euro, amid pressure for a partial correction from the recent gains. The renewed optimism for an economic recovery came under scrutiny after the British Retail Consortium reported that retail sales fell in March.
Sales at stores open at least 12-months plunged 1.2% from a year earlier, the ninth month of declines in ten. In the first quarter of the year, they declined 0.7% as consumers reined in spending, amid tighter lending restrictions and concerns over job security.Unemployment has risen at the fastest pace since 1971, while the economy has contracted 1.6% in the latest estimates for the fourth quarter, the most in nearly 30-years.
Home Retail Group Plc, the owner of Argos stores, said on March 12th that sales at its Homebase chain continued to decline towards the end of last year. Consumers are spending less on home improvements as the recession takes hold and the company has already cut 300 jobs this year and closed two warehouses to reduce costs.
The Bank of England have cut UK interest rates to an historic low of 0.5% and embarked on a period of quantitative easing, through the purchase of government and corporate bonds with newly created money. The Governor of the Central Bank, Mervyn King, said last week that the decline in gross domestic product will be similar for the first quarter of 2009.
The Pound retreated from recent gains against the majority of the 16-most actively traded currencies, despite a rebound in risk appetite, as UK stocks rose 0.55% on the day. The benchmark FTSE 100 Index breached the 4,000 barrier for a second day this week, as gains were led by Vodafone Group Plc, BP Plc and Tesco Plc.
The rally in equity markets failed to spark a rally in the Pound, to suggest that the UK currency may not be as susceptible to risk sentiment as it has been previously. The Pound's rally to the $1.5000 barrier for the first time in three months shows that financial markets are growing in confidence, despite the worst recession since 1984.
The Pound has gained 2.2% in value against the Dollar this year, to a high of 1.5086, but the UK currency fell back below $1.4986, indicating a rejection of the level. Sterling has also strengthened 8.2% against the Euro, as investors believe that the UK economy will be among the first to recover from the global slump, as the government does whatever is necessary to revive growth.
The Organisation for Economic Cooperation and Development said that the UK economy will shrink by less than the U.S and Europe this year. A statement from the OECD on March 31st said that the UK will contract 3.7% in 2009, compared with 4.1% in the Euro-zone and 4% in the U.S.
There has been so much bad news priced into the Pound that any indication of a recovery is giving investors enough reasons to buy. The UK currency was one of last year's worst performing currencies, declining 26% against the Dollar and 23% versus the Euro. The latest estimates show that more than 2 million workers are unemployed, while house prices slumped 17% in the past 12 months alone.
A report from the Royal Institution of Chartered Surveyors earlier this week showed that the decline in UK house prices actually eased in March. Daragh Maher, deputy head of global currency strategy at Credit Agricole SA, said that "we're seeing some green shoots in the UK housing market, which may drive the Pound towards 1.2000 per euro in the coming months.
A separate report from the Commodity Futures Trading Commission showed that the Pound will fall towards $1.4500 against Dollar and back below 1.1000 versus the Euro, as traders remain cautious over the prospects of an economic recovery. Nevertheless, technical analysts, who use historic trading patterns to predict future prices, suggest the Pound will continue to advance in the short-term. D
The Pound has been trading above its 100-day moving average against the Euro since April 7th, the first time that it broke through that level since November 3rd. In addition, Fibonacci charts show that the Pound may struggle to hold on to its recent gains, unless it break through $1.5074. The Pound almost reached that level on three occasions since falling to a low of $1.3505.
MPC member David Blanchflower warned yesterday that the UK is facing a job crisis and that further government action is required. Concerns over unemployment will also increase upward pressure on the budget deficit and the Pound may come under some selling pressure in the build up to Wednesday's announcement.
EUR/USD
The Euro fell to the lowest level in a month against the Dollar yesterday, as the single currency hit selling pressure above $1.3250. However, ranges were narrower and the Euro found buying interest below 1.3150, as important support levels held firm. The European Central Bank President Jean-Claude Trichet said that policy makers must do everything possible to boost confidence in the economy, signaling that he may be ready to implement less conventional policy tools.
The European economy is in the midst of the worst recession since the Second World War and the ECB's reluctance to cut rates aggressively has the left the Central Bank behind the curve. Yuji Saito, head of the foreign exchange group in Tokyo at Societe Generale SA, said that "ECB officials are increasing their rhetoric that they'll cut rates. The bias for the Euro is to the downside."
The Euro is headed for its second weekly loss against the Dollar, as Trichet also said that any uncertainty about the direction of monetary policy will delay a recovery in the Euro-zone. However, the Bundesbank President and ECB governing council member Axel Weber said that the Bank should refrain from cutting rates below 1%.
Weber's comments put him at odds with a number of other governing council members, indicating that policy makers are at odds on the best course of action to take. The ECB will cut interest rates by another 25 basis points on May 7th but some policy makers, including George Provopoulos, believe that the Central Bank should begin purchasing debt to pump money into the economy.
The Pound rose above $1.5000 against the Dollar, amid speculation that the the slump in the economy is abating
GBP/USD GBP/EUR
The Pound rose above $1.5000 against the Dollar for the first time since January and traded at the highest level in eight weeks versus the Euro, amid speculation that the slump in the UK property market has eased over the past month.
According to a report from the Royal Institution of Chartered Surveyors, the number of real estate agents reporting that house prices fell exceeded those reporting gains by 73.1 percentage points, compared with 78.1 in February.
The optimistic tone of the recent economic data has increased the positive sentiment for UK assets. Neil Jones, European head of hedge-fund sales in London, said that “overseas investors are looking to drip their toes back into UK assets whether by acquisitions or commercial and residential property assets”. Currency options suggested that traders were the most optimistic in almost four years for the Pound against the Euro.
The government is currently battling the worst economic slump since at least 1980 but some reports have indicated a recovery in the UK economy that may gather momentum towards the end of the year. The BRC retail sales survey was slightly better than expected, with like-for-like sales recording a 1.2% decline, while mortgage approvals increased in February and house prices rose for the first time since October 2007.
Ian Stannard, a currency strategist at BNP Paribas SA said that "data from the UK are showing the first signs of stabilization of the economic outlook. In the Euro-zone there are no such signs, and we are going to see Sterling continuing to outperform, gaining to 1.1574 in the coming weeks."
The Pound strengthened a further 0.6% against the Dollar yesterday, its third consecutive advance this week, despite the first drop in UK stocks since April 9th. Shares in the Rio Tinto Group declined 5.2%, as the world's third largest mining company reported slowing demand from steelmakers and lower iron-ore production.
The benchmark FTSE 100 Index lost 0.5% in London, as stocks fluctuated between gains and losses at least twelve times on the session. The move back towards so-called defensive stocks is an indication that investors are still skeptical whether any positive momentum in the market has the momentum to go further.
The FTSE 100 Index of stocks has rebounded 13% from its lowest point this year, as the Bank of England embarked on a period of quantitative easing. While the U.S Federal Reserve announced plans to buy treasuries and bonds backed by mortgages, as the Treasury Secretary Timothy Geithner pledged to finance the purchase of toxic debt.
The prospect of an economic recovery in the UK is stoking expectations that inflation will accelerate. The Debt Management Office reported yesterday that investor bids at a sale of £500 million of index-linked bonds outweighed the amount on offer by 1.62 times. The average at the past three sales of the securities has been 1.29 times.
The Bank of England have continued to embark on quantitative easing policy, as it confirmed the purchase of £3.5 billion of bonds yesterday, including £1.4 billion of securities. The fact that the Central Bank have begun printing money to temper the recession means that in due course there will be an upside risk to inflation.
The UK fiscal conditions will be watched very closely over the coming week, ahead of the annual budget. The deficit is likely to be over 10% of gross domestic product for the current fiscal year, which will certainly limit the scope for any further measures to support the economy. There was some profit taking the during Wednesday and again this morning, but the Pound looks poised to make further gains against the majors.
EUR/USD
The Euro initially pushed to highs around $1.3300 against the Dollar on Wednesday but the single currency was unable to sustain its momentum and had a generally weaker tone through the course of the day. ECB governing council member Axel Weber said that policy makers should reduce interest rates once more in May and then leave borrowing costs on hold at 1%.
Weber has been reluctant to follow the Bank of England and U.S Federal Reserve in cutting rates towards zero. His comments yesterday indicate that policy makers are divided on the best course for monetary policy and must resolve their difference over a package of new measures to rescue to the ailing economy.
The Bundesbank President told reporters in Hamburg that "it's necessary that we announce a refinancing framework that can be relied upon for a certain period of time. That includes the medium term level for the main refinancing rate". The tone of Weber's statement seems to suggest that he may have won support for his position on rates and it will be interesting to gauge whether policy makers are now prepared to look at less conventional techniques to revive the economy.
The governing council committee are due to meet again in May, with policy makers expected to cut the benchmark lending rate by 25 basis points to another historic low of 1%. The Euro will probably decline heavily against the majors if the Chairman Jean-Claude Trichet gives any indication that the Central Bank will engage in quantitative easing policy.
While not ruling out the purchase of corporate debt, Weber said that it should not be a priority for an economy that is primarily bank-financed. His opinion is in stark contrast to other governing council member such as Ewald Nowotny, George Provopoulos and ECB Vice President Lucas Papademos.
The dismal tone of U.S economic data did not have a decisive impact on the currency market but the Dollar may advance against the Euro for a third day, amid increased demand for the security of dollar denominated assets. Industrial production was weaker than expected, as output shrank a further 1.5% in March to record the worst quarterly performance in 60-years.
The New York State manufacturing index was actually positive in tone, with a stronger than predicted recovery in April, from a record low the previous month. However, headline consumer prices fell marginally on month to record an annual decline of 0.4% and this was the first decline since 1955.
The Pound rallied against the majors, as risk appetite returned to the market
GBP/USD GBP/EUR
The Pound strengthened to a six-week high of 1.1256 against the Euro yesterday, while the UK currency also retained a firm tone against the Dollar, challenging resistance levels above $1.4900. The rally in Sterling resisted pressure for profit taking and a correction, as confidence in the UK economy remains slightly more optimistic and an element of risk appetite returned to the market.
Profit at Goldman Sachs Group Inc beat analysts' expectations, fueling speculation that the worst of the financial crisis has passed. Banks from Barclays Plc to Citigroup Inc have reported a positive and profitable start to the year and the Pound climbed for a second day against the Dollar, after the results from Goldman Sach's topped even the most optimistic of predictions.
Barclays Plc and HSBC Holdings Plc rose in London trading, pushing the FTSE 350 Banks Index of shares up 3.4% on the session. UK stocks rose for a second consecutive day, as the rally in banks and mining companies overshadowed an unexpected drop in U.S retail sales and producer prices.
The benchmark FTSE 100 Index rebounded 1.2% from the low of the day, breaching the 4,000 barrier, before settling at 3,988.99, after Goldman Sachs said that it earning $3.39 a share in the first quarter beating the $1.64 expected, as trading revenue outweighed asset writedowns. The New York based company raised $5 billion in the largest stock sale this year, to help repay $10 billion in government aid.
David Jones, chief market strategist at IG Index in London said that "traders are getting a little reluctant to start committing to much more upside with economic news still serving a harsh reminder that things are not getting better just yet."
Barclays Plc jumped 10% in London, amid speculation that the bank may sell its asset management arm in an attempt to secure a higher price for its iShares unit. Lloyds Banking Group also gained 11%, while HSBC Holdings Plc added 1.5%, despite reports that the lender will cut 9,000 jobs worldwide.
The Pound strengthened 0.9% against the Euro and may continue to make gains in the short-term, amid a pick-up in sentiment over the past month. The UK currency will outperform the Euro as confidence in the global economy slowly returns and providing the pair remains above the psychologically important 1.1100 level.
Neil Mellor, a currency strategist at Bank of New York Mellon Corp, said that "the market's seeing the Pound supported over the longer term with some of the measures we've seen at the Bank of England and the government." However, the Pound's upside momentum may encounter some resistance around 1.1296, while 1.1111 will act as major support, as the level represents a 61.8% retracement of the Pound's decline from 1.2997 to a low of 1.0200.
In addition, escalating concerns over the Euro-zone economy should continue to underpin Sterling in the short-term, especially after finance ministers lodged complaints that the Euro is over-valued. In terms of economic data, the Pound also found support after the latest report from the Royal Institution of Chartered Surveyors was stronger than expected for March. Although 73% of surveyors still reported that house prices declined over the past month.
Elsewhere, a separate report from the Council of Mortgage Lenders showed that banks and building societies granted 24,300 loans in February, down 47% from a year earlier. Nevertheless, UK loan approvals from house purchases increased 4% from the previous month, increasing optimism that the slump in the property market is abating.
The UK fiscal conditions will continue to be closely watched ahead of next week's annual budget. Concerns over the debt outlook will tend to undermine confidence in the Pound, with the budget deficit expected to be over 10% of gross domestic product, which will clearly limit the scope for any further fiscal measures to support the economy.
EUR/USD
The Euro also declined heavily against the U.S Dollar yesterday, as U.S stocks fell and ECB governing council member Athanasios Orphanides signaled that the Central Bank may have to continue monetary easing beyond next month. In an interview with reporters, he said "if inflation threatens to remain significantly below 2% for a considerable period of time, then additional policy easing could be warranted".
Orphanides also warned that the "the risk of deflation has increased somewhat in the past few months" and his comments coincide with a recent statement from the ECB chairman Jean-Claude Trichet, who conceded that policy makers would need to lower interest rates again from the current 1.25%.
The Central Bank have shown a real reluctance to follow the Federal Reserve and Bank of England in bringing rates towards zero per cent and embarking on a policy of quantitative easing, to bring the economy out of the worst recession since the Second World War.
The Euro was subsequently unable to make a fresh move towards resistance levels at $1.34 against the Dollar. The single currency drifted back towards $1.3250 ahead of the U.S data releases. Retail sales unexpectedly dropped in March for the first time in three months, raising concerns that spending may falter once again heading into the second quarter.
According to a report from the Commerce Department, purchases plunged 1.1% from the previous month, while wholesale prices also declined, indicating that deflation risks remain a major concern. The downturn in sales has served to temper optimism that the U.S recession has passed the worst, which saw shares in U.S retailers plunge in New York.
U.S stocks slid, with the Standard & Poor's retailing index closing down 2.5%, while the broader S&P 500 Index was down 2%. There is a number of key economic indicators released this afternoon in the U.S, with the focus falling on the latest consumer price data, which is expected to show that inflationary pressures subsided in March.
The Pound rallies against the majors, after stocks bounce back from the first decline in five days
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Following on from last week, the Pound recorded a weekly loss against the U.S Dollar and Japanese Yen, as UK stocks fell for the first time in five weeks, reducing the allure of higher-yielding currencies amid concerns that the global recession is deepening. The FTSE 100 Index fell 1.1% from the high on April 3rd, as Royal Bank of Scotland Plc said that it plans to cut up to 9,000 jobs.
In addition, UK manufacturing output dropped by the most in at least four decades. According to a separate report from the National Institute of Economic and Social Research, the economy contracted 1.5% in the first quarter, as the recession increasingly resembled the one that started in 1979, when Margaret Thatcher became Prime Minister.
The correlation between stock market volatility and the performance of the Pound has become increasingly prevalent in recent months, particularly against the U.S Dollar. Geoffrey Yu, a currency strategist at UBS AG, said that "Cable is still risk based, so it moved in line with risk appetite throughout the week."
The Pound declined 1.3% against the Dollar last week, to a low of $1.4640, while the UK currency remained largely unchanged versus the Euro, amid speculation that the European economy is drifting deeper into a recession. The Bank of England interest rate announcement failed to provide any direction, as policy makers kept borrowing costs on hold at 0.5%, ending six months of rate reductions.
In the accompanying statement, the Central Bank confirmed that it had bought £26 billion worth of debt and policy makers had voted to continue with the asset insurance program totaling £75 billion, which was announced on the 5th March. The Pound had declined against the majors in the build-up to the announcement, amid suggestions that policy makers would slow so-called quantitative easing measures.
The Governor Mervyn King increased doubts about his intentions, when he indicated on March 24th that policy makers may not spend all of the money available to them. The Bank of England have set an example to other central banks around the world and the model has been adopted by the Federal Reserve, who have also begun a period of quantitative easing.
Jason Simpson, a UK interest rate strategist at Royal Bank of Scotland Group said that "the BoE's reaffirmed commitment to £75 billion was a marginal positive, but it didn't give any other details, so we don't know where we are in the process". The UK economy is shrinking at the fastest pace since 1980, threatening to push inflation below the central bank's 2.0% target and eventually stock deflationary pressures.
The Bank of England's chief economist Spencer Dale says that growth may return at the end of 2009 and investors have urged policy makers to maintain the pace of bond purchases to push down yields, easing volatility in credit markets. Interest rates are currently as low as they can go and when we get closer to spending the £75 billion allocated, investors will start looking at what happens next if it doesn't have the desired effect.
In terms of economic data, recent reports have indicated that the downturn in the economy is slowing, as a gauge of service sector growth rose to a six month high in March. A report from the Nationwide Building Society showed that a measure of house prices climbed for the first time in over a year, while the Bank of England also reported that financial institutions expect credit conditions to ease.
The report provides some level of optimism that the Central Bank's bond purchase program is increasing access to credit, as mortgage approvals also increase in March. However, UK unemployment is at the highest level since 1971 in February, with the number of people out of work expected to hit 3 million by the end of the year.
Elsewhere, UK producer prices increased in March at the slowest annual pace in almost two years, stoking concerns over deflationary pressures, as the recession deepens. The cost of raw materials continues to drop, as the cost of goods at factory gates rose just 2% from a year earlier. The result was lower than the 2.1% anticipated, while producer prices increased 0.1% on the month.
Falling raw material cost may help manufactures weather the recession, while the falling value of the Pound has increased concerns over the UK economy. Sterling has lost a quarter of its value in the past year and King said on March 24th that he doesn't see why the UK currency should decline any further.
The drop in value of the Pound has also stocked consumer price inflation in the latest figures from the Office of National Statistics. The annual rate of inflation rose to 3.2%, prompting the Central Bank governor to write another letter of explanation to the Chancellor Alistair Darling, as prices remain more than a percentage point above target.
The Bank Holiday weekend saw a revival in global stock markets, as the FTSE 100 Index rallied 1.5%, led by an increase in banking shares. Barclays Plc increased 12% after the UK's third largest bank agreed to sell its ishares unit to Wells Fargo. The increase in stocks has helped the Pound surge higher against the majors, rising to a high of $1.4917 this morning.
There is little data expected in the UK this week with the focus falling on the RICS house price survey, which will probably not indicate any significant recovery in the housing market. The positive sentiment of retail sales in March, which was indicated in the BRC survey, will also be of interest to investors and the Pound looks poised to test 1.1200 against the Euro.
EUR/USD
The Euro declined sharply against the Dollar on Thursday and remained weaker on Friday, as investors returned to the relative security of Dollar denominated assets. The single currency did stage a significant recovery on Monday, as trading liquidity was very low for much of the day, especially with European markets still closed for Easter holidays.
The Euro recovered from lows around $1.3120 to rally strongly to a high of $1.3390 in New York, as risk appetite was generally firmer, underpinning the Euro to some extent, although the impact was magnified by the fundamental lack of liquidity. In terms of economic, the Euro came under pressure last week as industrial production in Germany dropped for a sixth consecutive month in February.
The ongoing recession has sapped demand for goods at home and abroad, as industrial output fell 2.9% from the previous month, which slumped 6.1%, the most since the data began in 1991. The monthly decline was marginally less than expected, although output collapsed 20.6%, as companies scale back production and cut jobs.
The Dollar benefited from the increase in risk aversion last week and the U.S currency also made gains, after a government report showed that the trade deficit narrowed sharply to $26 billion for February, from $36.6 billion to the previous month. The gap in goods and services was the lowest deficit for almost 10-year, which will provide some underlying support to the Dollar.
Elsewhere, the U.S Federal Budget deficit was reported at $192.3 for March, as government spending surged and revenue declined sharply over the past year. For the first half of the fiscal year, the deficit more than tripled to a huge $956.8 billion, as the data illustrates the severe damage caused by the recession.
The deterioration could still be an important factor in undermining medium-term Dollar confidence, even with a lower trade deficit. In terms of economic data, the focus today will fall on the retail sales number for March. Although it may prove that the corporate earnings data will have the greatest impact this week.
The Pound declines against the majors, on speculation that the recession is deepening
GBP/USD GBP/EUR
The Pound met strong resistance at $1.4740 against the Dollar on Wednesday, while the UK currency was unable to sustain a move beyond 1.1100 versus the Euro, amid speculation that the recession is deepening. Sterling also weakened against the Japanese Yen as UK stocks fluctuated between gains and losses, while the report from the National Institute of Economic and Social Research showed that the economy contracted 1.5% in the first three months of the year.
The benchmark FTSE 100 Index for for a fourth consecutive day, following the dismal tone of the economic data, while Bank of Ireland Plc lost another 6.5% in market value. Moody's Investors Service cut credit rating on 12 Irish banks, amid concerns that loan losses are increasing.
The drop in gross domestic product followed a 1.6% decline in the fourth quarter of 2008, as the recession matched the one that started in 1979, when Margaret Thatcher came to power. In a separate report from the Nationwide Building Society, consumer confidence remained at the lowest level in at least four years, as banks refused to increase lending and unemployment rose.
The official estimates of UK unemployment showed that number of people out of work jumped to the highest level since 1971 in February. The Royal Bank of Scotland Group Plc, who has been taken under government control during the financial crisis, confirmed earlier this week that it will slash up to 4,500 back office jobs in Britain, in an attempt to cut costs.
Concerns over job security has also had a major effect on retail sales, as the Nationwide's index of consumer confidence slipped to a reading of 41 in March, matching the lowest reading in four years. In a survey conducted by the lender, two thirds of people believe that there are too few jobs available.
In the accompanying statement, the NIESR said that "the output fall so far is very similar to that of the recession that began in the Summer of 1979. If the 1980s profile were followed, output would continue to decline for up to another year and it would take two further years before the level output enjoyed at the start of 2008 would be reached again."
The Institute, whose clients include the Treasury, based its estimates on the official statistics for UK industrial production and other indicators for services. The statement also indicated that there is no "obvious reason" why this recession will follow the same course as the one in the early 1980s. Thatcher succeeded James Callaghan as the Prime Minister in May 1979, following the so called Winter of Discontent.
The recent wave of optimism that the economy's deterioration is slowing has helped the Pound rally against the majority of the 16-most actively traded currencies. A gauge of service industries rose to the highest level in six months, while Nationwide also reported that UK house prices rose for the first time in over a year.
The Bank of England also reported that credit conditions have ease, suggesting that the economy may start to recover in the second half of the year. However, the mounting number of foreclosures and the fastest rise in unemployment for thirty years has forced Gordon Brown to redouble his efforts before the next general election.
The focus today will inevitably fall on the Bank of England interest rate announcement this lunchtime. There is strong possibility that the Monetary Policy Committee, led by the governor Mervyn King, will leave interest rates on hold at 0.50% and therefore any market impact should be limited. Nevertheless, any remarks on quantitative easing policy and inflationary pressures will still be very important to assess whether the pace of corporate bond buying could be accelerated or slowed.
Investors will scutinise any comments on fiscal policy, although the BoE may refrain from issuing a statement with the decision. Plans to increase the pace of quantitative easing would probably undermine the Pound. Net currency losses should be contained unless risk appetite deteriorates sharply, while the tentative improvement in sentiment this morning has helped Sterling edge higher against the Dollar.
Mervyn King is under pressure from investors who are concerned that the Central Bank may not honor its pledge to buy £75 billion in government bonds and subsequently undermine efforts to rescue the economy. King's plan to purchase struggling assets with newly created money was hailed as model for Central Banks around the world when it was unveiled a month ago, including the U.S Federal Reserve.
EUR/USD
The deterioration in global stocks hampered the Euro yesterday, as the single currency sank to lows just below $1.3150 against the Dollar, but recovered some of the losses later in the day as support levels held firm. There were further concerns over the state of the European economy, after economic reports showed that the recession is Germany is deepening.
The European Central Bank's reluctance to cut interest rates as aggressively as other Central Banks and implement non-conventional policy measures, means that an economic recovery in the region is lagging behind. German manufacturing orders fell by more than initial forecasts in February, extending their worst decline on record.
Orders fell 3.5% on the month from January, the sixth consecutive drop, as the global recession sapped demand for exports and dampened business investment. The extent of the decline was far in excess of the 2.1% expected, while orders plunged by a record 38.2% over the course of the year. Companies like Volkswagen AG in Germany have scaled back production and cut jobs.
The German coalition plans to spend in the region of €82 billion to stimulate the economy, including tax breaks and investment in infrastructure. The outlook for industrial orders in the meantime remains bleak and the economy may shrink as much as 7% this year, as interest rate cuts and fiscal stimulus measures take time to have an effect.
Elsewhere, a separate report showed that Germany's inflation rate fell to the lowest level in nearly ten-years in March. Harmonised consumer prices slowed to 0.4% from 1% in February, as oil prices fell from a record level and the deepening recession eroded demand. The ECB last week lowered the benchmark interest rate to 1.25% and the Chairman Trichet said that they may lower it further, despite the escalating concerns over deflation.
The Pound rallied against the majors following a smaller contraction in UK manufacturing
GBP/USD GBP/EUR
The Pound rallied against the majors yesterday, as the UK currency rose to a high of 1.1120 versus the Euro during the European session, despite reports that manufacturing output dropped by the most since comparable records began in 1968. The Pound also stood firm against the U.S Dollar, as the FTSE 100 Index dropped for a third day, led by a decline in banking shares.
The benchmark FTSE 100 Index slipped 1.6% in London, with shares in Royal Bank of Scotland Group Plc losing 10%, as the struggling lender announced a series of substantial job cuts. The UK stock market has rebounded 12% from its yearly lows, as banks from Barclays Plc to Citigroup Inc reported a positive and profitable start to the year.
The global recession has sapped global demand for British-based goods, as production fell 6.5% in the three months through February, the most since records began almost 41-years ago. The report from the Office of National Statistics showed that output declined 0.9% from January, which was actually smaller than economists had previously anticipated.
The Bank of England have struggled to pull the economy out of the most severe recession since 1980. Policy makers slashed borrowing costs to a record low of 0.5% in March and began printing money and pumping it into the economy through a process known as quantitative easing. A separate report from the British Chamber of Commerce showed that an index of service industries rose to a six-month high in March.
The surprisingly optimistic tone from the BCC, together with a smaller contraction in manufacturing, has created some renewed optimism within the UK economy. However, Alan Clarke, an economist at BNP Paribas SA in London, said that "it's going to take a long time before we see any expansion in the economy again"...the pace of contraction may moderate, but ultimately the bank may have to do a lot more."
UK factory production has now slumped for 12-months consecutively, the longest stretch since Margaret Thatcher came to power in 1980. While the monthly drop in February was the smallest in six months, the annual decline of 13.8% was the largest annual contraction since 1981.
The governor of the Bank of England Mervyn King said last month that the first three months of the year will probably see a similar drop in gross domestic product to the previous quarter’s 1.6%.
The Central Bank has already cut UK borrowing costs close to zero and began buying government and corporate bonds with newly created money, in an attempt to bolster the ailing economy.
The Monetary Policy Committee are next due to convene this Thursday and will probably keep interest rates on hold at 0.5%. Economists will be looking to the accompanying statement for any further indication on quantitative easing measures and that may undermine confidence in the Pound.
Underlying fears over government debt will also be an important factor this week, especially with the UK budget due for release in two weeks time. The emergency Irish budget will increase concerns that the UK fiscal situation will deteriorate further, as the economy contracts. The Pound will still be strongly influence by the volatile swings in risk appetite with Sterling liable to be under significant selling pressure if there is a sharp downturn in financial stocks.
The Pound continued its upside momentum and against the Euro yesterday and recovered earlier losses versus the Dollar, rising to a high of $1.4775 by the close of trading last night. According a report from BNP Paribas SA, investors are being advised to use any losses by the Pound against the Dollar, caused by fluctuations in stocks, as an opportunity to increase bets on the UK currency.
EUR/USD
European stocks also declined yesterday and the subsequent revival in risk aversion saw the Euro decline against the U.S Dollar, falling to a low of $1.3227, from 1.3417 earlier in the day. Gross domestic product in the Euro-region fell 1.6% from the previous quarter, the most in at least 13-years, signaling that the recession has deepened more than estimated in the fourth quarter.
Companies have been forced to scale back production, due to a fundamental lack of domestic and international demand, while consumer spending has declined amid rising unemployment. The report from the European Union also showed that business investment plunged 4%, also more than expected, while household spending fell 0.3%.
The Euro extended its 1.4% decline against the Dollar, after companies like Volkswagen AG cut output and slashed jobs. According to a report from the Organisation for Economic Cooperation and Development, the European economy, which grew at 0.8% in 2008, will contract 4.1% this year. The ECB are exploring new less conventional methods to stimulate the economy, after admitting a reluctance to cut interest rates under 1%.
Elsewhere, a separate gauge of the report showed that consumer spending fell 0.3% on the month, despite initial forecasts of a 0.9% contraction, published in March. However, retail sales plunged by a record 4% in February in the official data released yesterday, indicating that consumers' are still pessimistic over the outlook for the economy and job security.
While the rate pace of the contraction in European manufacturing and services industries may be slowing, policy makers are faced with mounting pressure over rising unemployment. The jobless rate in the Euro-zone rose to 8.5% in February, the highest amount in almost three years, while consumer sentiment fell to a record low last month.
The European Central Bank last week cut its benchmark interest rate by 25 basis points to a record low 1.25%, taking its reductions since early October to 300 basis points. Nevertheless, the Central Bank are still lagging behind the U.S Federal Reserve and the Bank of England, who have both cut interest rates to near zero and have begun pumping money into their economies by buying government bonds.
However, ECB governing council member George Provopoulos suggested that the Central Bank may cut its benchmark lending rate below 1% if the economy continues to deteriorate and could also in engage in some method of quantitative easing measures. His comments contrast with a recent statement from the Bundesbank President Axel Weber who said that 1% would be his lower limit.
The Pound declines against the Dollar on concerns that banking losses will increase
GBP/USD GBP/EUR
The Pound declined against the Dollar yesterday, after initially rising above $1.4900 earlier in the session, amid concerns that losses at banks will swell and erode the allure of higher-yielding assets. The UK currency also lost ground against the Japanese Yen, as the benchmark FTSE 100 Index of stocks dropped 0.9%, after an initial increase of 1.7% earlier in the day.
The correlation between the aggressive swings in the equity market and the performance of the Pound has become increasingly prevalent in recent months. The general reversal in risk appetite that coursed through the market last week drove Sterling to a low of $1.4640 overnight. Mike Mayo, an analyst at Carlyon in New York, estimated that loan losses at banks will exceed levels from the Great Depression.
The Pound subsequently declined against all of the lower-yielding currencies, as trader sought the security of Dollar denominated assets. The UK currency fell 26% against the Dollar last year, and 23% versus the Euro as the UK economy slumped into its worst economic contraction since 1980. The government was forced to bailout banks, including Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc, while implementing the most aggressive policy easing in UK history.
The Chancellor of the Exchequer Alistair Darling said yesterday that the recession was worse than he predicted in November, suggesting that the deficit will be wider than the £118 billion anticipated by the Treasury. Darling is poised to deliver his annual budget statement on April 22nd and Unions are pressing the government to increase spending, countering a warning from the Bank of England to keep a lid on the deficit.
The Pound has performed well over the past six weeks but the deterioration in the UK economy may limit the recent gains. The UK currency is susceptible to swings in risk sentiment and the ongoing economic problems. Paul Day, chief market analyst at MIG in Switzerland said that "the Pound remains a currency that has the ability to collapse at some point in the future."
The Pound actually advanced against almost all of the 16-most actively traded currencies in early trade, following a stock sale by HSBC Holdings Plc. Europe's biggest bank said that investors bought about 97% of the shares on offer in its £12.85 billion sale and that increased optimism that the worst of the financial turmoil may be easing.
As domestic and international confidence remained firmer, the Pound pushed to an 8-week high of $1.4935 against the Dollar. The UK currency advanced well above 1.1000 versus Euro, amid separate reports that UK service industries declined at a slower pace in the first quarter, a sign that the recession may be easing.
The report from the British Chamber of Commerce was broadly better-than-expected, as the net balance of service companies reporting a drop in orders was minus 23, compared with minus 31 in the three months through December. However, a gauge of factory sales slumped to the lowest level since comparable records began in 1989. The BCC expects the UK economy to contract 3% this year, as the global downturn weighs on trade and boosts unemployment.
The focus this week will inevitably fall on the Bank of England interest rate announcement on Thursday. The benchmark lending rate is already at its lowest level in history at 0.50% and it is unlikely that rates will fall any further. The Monetary Policy Committee is expected to focus on quantitative easing measures, after spending another £2.5 billion on gilts yesterday.
In terms of economic data, markets will be looking for any further signs that the slump in manufacturing has eased, with the BCC set to release its quarterly survey this morning. The Pound may also be susceptible to reports that industrial production remained weak in February, although the impact should be limited given that a depressed figure is already expected.
EUR/USD
The Euro has encountered tough resistance above $1.3550 against the Dollar and although European economic data was mixed, if failed to have a telling impact on the market. European producer prices fell by more than initial forecasts in February, while retail sales dropped by a record amount. The extent of the decline highlights the increased risk of deflation in the region, as the so-called factory-gate inflation fell 1.8% from a year earlier.
The government report confirmed that producer prices fell by the most since April 1999, while retail sales dropped 4% from a earlier, as the worsening global slump and a 60% drop in oil prices, from a July record of $127 a barrel, have eased inflationary pressures across the Euro-zone. The Chairman of the European Central Bank, Jean-Claude Trichet said last week that consumer prices may record a temporary decline this year.
In addition, ECB governing council member Bini-Smaghi suggested yesterday that intervention to influence currency values could be warranted. However, using currency rates to gain an advantage could fuel protectionism and the comments from the ECB may give an indication that policy makers are becoming more concerned with other major economies undertaking a similar initiative.
Data Released 7th April
U.K 09:30 BCC Quarterly Manufacturing Survey (Q1)
U.K 09:30 Industrial Production (February)
- Manufacturing Production
EU 10:00 Gross Domestic Product (Q4 Revised)
U.S 19:00 FOMC Pulishes Minutes of 19th March Meeting
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The Pound rallies against the majors, as global stocks increase following the G-20 statement
GBP/USD GBP/EUR
The Pound strengthened against the Dollar yesterday, rising to a high of $1.4770, whilst the UK currency also touched a high of 1.1000 versus the Euro. Stock markets around the world rallied strongly, with oil and metals also rising, as the Group of 20 leaders met in London to discuss of a cohesive stimulus plan, amid mounting evidence that the worst of the global recession may be over.
World leaders managed to put their differences aside and agreed on changes to the regulatory system, in reining in the excesses that led to the worst financial crisis since the Great Depression. The Group of 20 policy makers also pledged $1 trillion in emergency aid to cushion the blow from the economic downturn.
In addition, there will be stricter limits on hedge funds, executive pay, including bonuses, credit-rating firms and risk taking by banks. Policy makers tripled the firepower of the International Monetary Fund and offered funds to revive global trade to help governments cope with the turmoil, resulting from the surge in unemployment.
The statement from the G-20 could be interpreted as a change to the rules of capitalism in an effort to address the world economy, which has outgrown the ability to keep it in check. In the aftermath of the statement, President Barack Obama said that "by any measure the London summit was historic". The talks resulted in the biggest overhaul of the financial regulatory system since the introduction in the U.S of securities regulation, following the 1929 Wall Street crash.
The UK FTSE 100 Index climbed above the 4,000 level for the first time in almost six weeks, creating a strong element of risk appetite that encouraged traders to buy high-yielding assets with low costs loan from Japan. Barclays Plc and HSBC Holdings Plc both rallied more than 7% in London, as reports showed an unexpected increase in UK house prices.
The UK stock market has gained 17% from its 2009 lows, as banks from Barclays to Citigroup Inc reported profitable starts to the year. While the Treasury Secretary Timothy Geithner unveiled plans to rid struggling financial companies of toxic assets through a process of quantitative easing.
Geithner said yesterday that there are some "encouraging signs" that financial markets are recovering, as some reports suggest that the pace of the economic decline is easing. The increased sense of optimism surrounding the G-20 summit correlated with reports that U.S durable goods orders and home sales rose in February.
In addition, some reports in the U.S and China indicate that the pace of the economic decline may be easing and credit market conditions shows some signs of a recovery. The September bankruptcy of Lehman Brothers Holdings Inc was the biggest in American history but reports yesterday showed that Auto sales also improved from a 27-year low in February.
The revival in banking stocks gathered pace, as the Nationwide Building Society said that UK house prices unexpectedly rose for the first time since October 2007. The Bank of England's aggressive policy action in cutting interest rates to an historic low of 0.5% has attracted buyers to the property market, while mortgage approvals also rose on the month.
The average cost of a home in Britain jumped 0.9% in March, from the previous month to £150,496. The optimistic tone of the report increased the chances of a revival in housing, while banks granted the highest number of home loans in nine-months. There is mounting evidence that the slump in the UK property market may be abating, after a 15.7% drop in prices during the past year.
UK mortgage approvals rose to 38,000 in February, up from just 27,000 in November and BoE policy maker Spencer Dale said last week that there are signs the housing market has stabilised. Economists and Goldman Sachs Group Inc also said that there may be evidence of a pick-up in the markets, as mortgage approvals improve.
Lenders have hoarded cash and restricted borrowing after recording more than $1.2 trillion in losses worldwide since the start of the global financial crisis. The Bank of England has pledged to buy up to £75 billion of corporate and government bonds to stimulate spending and revive the economy, by doing whatever is necessary in lowering borrowing costs.
In a separate statement from the Bank of England, UK banks may start to lift lending restrictions to consumers and companies over the next quarter, after interest rates fell and funding loans became easier. Elsewhere, a report from the Chartered Institute of Purchasing and Supply showed that an index of construction activity rose, while still showing a contraction in the sector.
EUR/USD
The Euro rose by the most against the Dollar in two weeks yesterday, touching a high of $1.3494, after the European Central Bank elected to cut interest rates by a smaller-than-expected 25 basis points. Policy makers effectively deferred from a decision to do whatever is necessary to rescue the economy, favoring a more tentative approach that will surely delay an economic recovery.
Prior to the European Central Bank interest rate announcement, the Euro had hit a low of 1.1000 versus the Pound, amid speculation of a 50 basis point reduction and signs that the Central Bank would look at less conventional policy measures to revive growth. However, the governing council committee elected to act more conservatively and lower borrowing costs by just 25 basis points to 1.25%.
In the accompanying press conference, Trichet failed to give any indication that the ECB would move towards some method of quantitative easing. Instead, the Central Bank President said that policy makers are ready to lower rates further and will probably keep the deposit rate at its current level.
The ECB are persisting with this "wait and see" approach to policy easing and appear adamant that they won't follow the Federal Reserve and Bank of England in printing money to buy government or corporate bonds. The cut in rates today is less than economists' had predicted, despite signs that the Euro-zone economy is heading into a deeper, more prolonged recession.
In a statement to reporters, Trichet said that the Bank will announce "full details" of possible less conventional measures in May. The Euro has rallied towards 1.0900 in the aftermath of the announcement and may continue to make gains versus the Dollar, as equity markets continue to rally.
The Pound rallied against the majors, after UK manufacturing climed to the highest level in five months
GBP/USD GBP/EUR
The Pound rallied to its strongest level versus the Euro in over two weeks yesterday, rising to a high of 1.0970, while the UK currency also remained firm against a basket of currencies, including the U.S Dollar. A report from the Chartered Institute of Purchasing and Supply showed that its UK manufacturing index climbed in March to the highest reading in five months.
The gauge based on a survey of factories advanced to a reading of 39.1 in March from 34.9 the previous month. Although the reading was below 50, indicating contraction for the eleventh consecutive month, the results of the report were far better than initial estimates. The optimistic tone of the index raises hopes of a revival in the manufacturing sector and correlates with comments from Spencer Dale last week, who said that the economy may start to recover at the end of the year.
The new orders index of the report was at the highest level since August, as input costs and selling prices declined. However, Rob Dobson, an economist at Markit, said in a statement that "we are still a long way off levels associated with an outright recovery and conditions remain fragile overall".
The UK economy shrank 1.6% in the fourth quarter, and Dale, the Bank of England's chief economist, confirmed that the first three months of 2009 will show a similar contraction. The Organisation for Economic Cooperation and Development predicted yesterday that UK gross domestic product will fall 3.7% this year.
Elsewhere, gilts also advanced after the UK sold all of £3.5 billion of six-year notes at an auction, while the Bank of England also bought the same amount of securities as part of an asset-purchase program, designed to lower borrowing costs. The Pound advanced against the Euro and may continue the upside momentum, amid the release of the latest UK house price data.
In addition, the Pound also benefited from an increase in risk appetite, as UK stocks rallied for a second day in succession, after U.S reports suggested that the recession may be abating. The FTSE 100 Index climbed 0.8% in London, led by a 4.4% increase in the share prices of Vodafone Group Plc.
Martin McMahon, a currency strategist at Credit Suisse Group AG, said that "Euro-sterling in the mid to low 90s is very overvalued...this quarter is probably the final leg of Sterling weakness". The Pound has suffered against the Euro this year from the commencement of quantitative easing policy. However, the UK currency may make gains, particularly against the Euro, as the ECB look increasingly likely to implement its own measure of quantitative easing.
The Bank of England have cut interest rates from 4.5% in October to a record low 0.5% in March. Policy makers also announced that they would begin buying corporate or government bonds with newly created money, in an effort to revive economic growth. The Pound rallied for a second day against the Dollar yesterday, rising to a high of $1.44 last night, as world leaders arrived in London for the G-20 summit in London.
The U.S President Barack Obama and the Prime Minister Gordon Brown met in Downing Street yesterday and urged G-20 leaders to work together and combat the crisis. They are due to meet today and talks will begin, aimed at formulating plans to overcome the first global recession since the Second World War.
France, Germany and Japan have all raised concerns that today's meeting of the leaders from the G-20 nations may fail to reach a consensus. That would deal a clinical blow to the summit's aim of identifying ways to end the global economic slump but President Obama said yesterday that "reports of disagreements are vastly overstated."
Brown said yesterday that government's worldwide have agreed to spend about $2 trillion in fiscal stimulus measures to fight the "unprecedented" financial crisis. At the top of the agenda for the G-20 today is a common regulatory framework to rein in hedge funds, derivatives trading, executive pay and risk taking by financial firms.
The French President Nicolas Sarkozy said that the agenda doesn't do enough to crack down on tax cheats. His finance minister Christine Lagarde, has threatened to walk out of the summit if his push for stricter regulation fails. Should the G-20 fail to come to an agreement then it could have a negative impact on the global stock markets, which may curtail the Pound's tentative momentum against the Dollar.
EUR/USD
The Euro rose against the Dollar yesterday, as Asian stocks gained on speculation that the worst of the global economic slump may be coming to an end, spurring investors to increase holdings of higher-yielding assets. The single currency also advanced, amid suggestions that the European Central Bank President Jean-Claude Trichet, will refrain from cutting interest rates any lower, after a further reduction this lunchtime.
The governing council committee will probably cut the benchmark lending rate to a fresh historic low of 1% today. In the accompanying press conference, Trichet may provide some indication that policy makers are reluctant to reduce interest rates any further, and may move towards less conventional policy easing measures.
Any signs that the ECB will undertake some method of quantitative easing policy is likely to undermine the Euro. The key resistance levels against the Pound will be located around 1.0970 and a significant breakout through this level could provoke a move towards 1.1100.
The overall increase in risk sentiment pushed the Euro higher against the Dollar yesterday, despite the dismal tone of European economic data. Unemployment in region increased more than economists expected in February, rising to the highest level in almost three years. The deepening recession is forcing companies across the Euro-zone to cut output and slash jobs.
The jobless rate rose to 8.5%, from a revised 8.3% in January and the report represents the highest reading since May 2006, exceeding economists' forecasts. The Euro-zone economy is expected to shrink 4.3% this year, the biggest contraction in over 50-years.
The recovery in equity and commodity markets continues to undermine Dollar sentiment, while the U.S currency also lost ground against the majors, amid speculation that the U.S government will allow GM Motors Corp to go bankrupt. In terms of economic data, the Dollar failed to find any support as the ISM manufacturing index climbed for a third consecutive month.
The recession in the U.S may be abating, as reports yesterday showed sustained improvements in manufacturing and housing, the areas in the steepest decline. However, the deteriorating labour market conditions are still a source of concern to the government, as the ADP employers index showed that the U.S lost an estimated 742,000 workers in March.
The Pound rallied against the majors, after UK consumer confidence increased to the highest level since May
GBP/USD GBP/EUR
The Pound resisted a further slump below $1.4200 against the Dollar yesterday, to challenge resistance levels above $1.4306, following reports that UK consumer confidence increased the highest level since May. The Bank of England have slashed interest rates to a record low of 0.5% since October, in a somewhat vain attempt to revive lending conditions.
The Gfk index of sentiment rose five points to a reading of minus 30 in March and the report increases some level of optimism in the UK economy, suggesting that lower rates are restoring confidence. Recent estimates have shown that the economy contracted at the fastest pace since 1980 in the fourth quarter, while unemployment rose to the highest level in nearly 40-years.
The confidence data will trigger some hopes that domestic spending will be broadly resilient over the coming months, despite a very weak labour market. In addition, UK mortgage approvals also rose to the highest level since May last month, while house prices fell the by the least amount in 10-months during March.
This will offer some degree of support for Sterling, as the UK currency also made sharp gains against the Euro, rising to a high of 1.0880, amid increased fears over the Euro-zone economic outlook. The revival in the Pound gathered momentum throughout the course of the day, after separate reports showed that the UK's biggest clothing retailer, Marks and Spencer Group Plc, reported fourth quarter sales that beat analysts' expectations.
Shares in Marks and Spencer Group Plc climbed as much as 13% in London, after the report that sales at stores open at least a year declined just 4.2% in the 13-weeks ending March 28th, despite initial estimates of 6.8% slide. The Pound advanced 0.4% to a high of $1.4327 yesterday, reducing its quarterly loss to 1.8%, while the UK currency advanced 3.3% versus the Euro since the start of the year.
The correlation between stock market volatility and the Pound's performance against the Dollar has been increasingly prevalent over recent months. The UK currency has struggled to hold on to gains against the it's U.S counterpart, as economy slumped into its worst recession for three decades.
The Prime Minister Gordon Brown has completed a diplomatic tour by urging finance minister within the G-20 to create more than 20 million jobs and work together in pulling the global economy out of its current slump. Brown said yesterday, "we must take action necessary to prevent the suffering of the past in mass long-term unemployment and save and create more than 20 million jobs".
The Pound has recorded its first quarterly gain against the Euro since June, after the Bank of England cut borrowing costs to a record low and began printing money to purchase government and corporate bonds, in a policy known as quantitative easing. The UK currency may continue to make gains against the Euro this week, as the focus switches to the ECB press conference on Thursday and the G-20 summit in London.
Nevertheless, overall confidence in the UK economy will probably remain weak, especially if there is a depressed reading for the PMI manufacturing survey this morning. The Pound will largely be dependent on a sustained improvement in risk appetite to hold on to its recent gains, as UK stocks rallied again yesterday, following the optimistic report from the Marks and Spencer Group Plc.
EUR/USD
The Euro settled below $1.3300 against the Dollar, after reaching a high of $1.3340, as risk appetite deteriorated again in Asia with further speculation that the U.S government is moving towards a policy of letting General Motors Corp go bankrupt. Concerns over the Euro-zone economy and falling domestic demand is also weighing on the single currency, as it retreated back below $1.3200 by the close last night following a barrage of weak economic data.
German retail sales declined for a 10th consecutive month, while unemployment in the region rose than initial estimates, as foreign and domestic demand weakened. The number of people out of work rose to an adjusted 69,000 in February, to 3.4 million, despite expectations of a more modest increase of 52,000.
Weakening demand is affecting companies' profits and forcing them to slash production costs and slash jobs. The unemployment rate subsequently edged higher to 8.1%, from 5% the previous month. The downturn in growth within industrial sectors is spreading to the broader economy and consumer spending will remain weak over the coming months, delaying an economic recovery.
German exports, which accounts for roughly a third of the economy, are declining amid a fundamental lack of demand from overseas, while business confidence in Europe fell to a record low in the latest figures for March. The Organisation for Economic Cooperation and Development said yesterday that the combined economy of its 30 member states will shrink 4.3% this year, the most in over 50-years.
Elsewhere, a report from the European Union showed that Europe's inflation rate dropped more than initial expectations, to the lowest level on record in March. The intensifying economic slump has increased concerns that deflationary pressures are emerging, amid the worst recession since the Second World War.
Inflation slowed to 0.6%, from 1.2% in February, and the March rate was the lowest since the data was first compiled in 1996. There is a strong possibility that the European Central Bank will cut interest rates to another historic low on Thursday.
The accompanying press conference will be watched closely for any comments on the introduction of non-conventional policy measures and that will have a significant impact on the Euro, with any move towards quantitative easing likely to undermine the single currency.
The Dollar is largely dependent on risk and made gains against the majority of the majors, after Asian stocks weakened overnight, and traders sought the security of Dollar denominated assets. The U.S economic data was slightly weaker than expected and contributed to a slightly more cautious tone. The Chicago PMI index weakened to a reading of 31.4 in March, as all of the main components of the report remained at near record lows.
Consumer confidence edged higher to a reading of 26.0, from a record low of 25.3, amid concerns of the deteriorating U.S labour market. The economy has lost over 650,000 jobs for three straight months, while shrinking household wealth would indicate that recent gains in consumer spending will not be enough to lift the economy out the recession.
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