by Adam Solomon
Sterling / Euro and US Dollar
The Pound has weakened for a third straight day against the Euro, while the UK currency also declined against 15 out of the 16 most actively traded currencies, after a report from the Nationwide Building Society showed that UK house prices slumped by the most in six months in August. A separate report showed that an index of British construction fell last month to the lowest level since February, a further indication that the UK economic recovery peaked in the second quarter.
The Pound is also struggling in the build-up to the October 20th announcement where the government is poised to slash public spending by the most in a generation to combat the nation’s crippling debt level and rein in the budget deficit. The recent downward trend that has engulfed the Pound is perfectly summed up by Ian Stannard, a senior currency strategist at BNP Paribas SA. He says that “the UK recovery may have run its course. That leaves Sterling very vulnerable. We continue to expect Sterling to come under pressure.”
Stannard also said that he expects the Pound to fall towards 1.1764 against the Euro over the next week and $1.5125 versus the U.S Dollar. The UK currency continued to slip to a three month low against the Euro, as the European Central Bank raised its economic forecasts and President Jean-Claude Trichet said a double-dip recession in the Euro-zone is “not on the cards.”
The UK economy expanded in the second quarter at the fastest pace since 2001, but there is increasing evidence that the recovery is stalling. Manufacturing grew at the slowest pace in nine months in August, while UK house prices continue to fall, as consumer confidence weakens, in the build up to the release of the government’s austerity measures due in October.
Euro and Dollar buyers have seen the Pound continue to decline through the course of this week and it may be a prudent move to take advantage of the current rate with further declines likely. The Pound has depreciated 0.5% against the Euro today, trading back under the pivotal 1.20 level, the weakest since August 10th. The UK currency has also slumped 0.3% versus the Dollar to $1.5405, after earlier falling to the lowest level since July 23rd.
According to analysts at RBC Capital Markets, the Euro may advance in excess of the highest level in three months against the Pound, after the single currency’s recent sell-off failed to set a new low for the first time since February. The Euro dropped as far as 1.2282 last month, staying above the June low of 1.2394, but yesterday’s key reversal under 1.20 indicates “a bullish trend reversal”.
George Davis, chief technical analyst at RBC, said in a statement yesterday that “this is the first time since February that a sell-off has failed to establish a new low. Bearish sentiment may be eroding.” The Euro’s next target is 1.1764, a 38.2% retracement of its decline between March and June, Davis said, referring to one of the numbers of the Fibonacci sequence.
The housing data has remained weak and there will be persistent fears that weakness will spread to other areas of the economy. The Pound will be particularly vulnerable if there is any evidence of a second recession. The UK currency gained a degree of support from an improvement in risk appetite, while a generally weaker Dollar also helped provide protection.
Euro / US Dollar
The Euro came under renewed selling pressure against the U.S Dollar and Japanese Yen, after the European Central Bank kept interest rates on hold at a record low of 1%. The ECB’S governing council left rates unchanged for a 17th month and policy makers are expected to extend emergency lending measures for banks well into next year, as the risk of a second U.S recession threatens the European economic outlook.
The European economy has expanded at the fastest pace in four years in the second quarter, but the sovereign debt crisis and the U.S slowdown pose significant risks to the recovery. ECB council member and Bundesbank President Axel Weber said last month that the ECB should help banks through the end of year liquidity stresses before deciding whether to withdraw emergency stimulus measures completely.
The Euro found support below $1.28 against the Dollar after successful bond auctions in Spain and France, together with an improvement in risk appetite. Nevertheless, confidence could still unwind quickly given the underlying structural vulnerabilities within the Euro-zone. U.S jobless claims recorded a small decline to 472,000 in the latest weekly data and there will be a high degree of caution ahead of the non-farm payrolls report this afternoon.
Data Released 3rd September
U.K 09:28 – CIPS Services PMI (August)
EU 08:58 – Market Services PMI (August)
EU 10:00 – Retail Sales (July)
U.S 13:30 – Non-Farm Payrolls (August) – Unemployment / Average Earnings
U.S 15:00 – ISM Services PMI / Business Activity (August)
Related posts:
- Foreign Exchange Daily Insight – The Pound rallies for a third straight day as GDP is revised higher
- Daily Foreign Exchange Rate Forecast – The Pound remained largely unchanged against both the U.S Dollar and the Euro yesterday
- Daily Foreign Exchange Rate Forecast – 30th July
- Daily Foreign Exchange Rate Forecast – The Pound rallied against the struggling U.S Dollar
- Daily Foreign Exchange Rate Forecast – The Pound is being undermined
