by Adam Solomon
Sterling / Euro and US Dollar
The Pound remained on the defensive against the U.S Dollar yesterday and re-visited support levels close to $1.53 before a sharp move higher overnight. The UK currency also gained ground versus the Euro, rising above 1.21, amid renewed fears over the European banking sector and sovereign debt default risks.
In this environment, the Pound may continue to make gains versus the Euro in the very short-term, but the UK currency will be susceptible to general selling pressure if confidence in the UK banking sector weakens once more. There is a lot of emphasis on the Bank of England interest rate announcement on Thursday, amid speculation that policy makers will extend quantitative easing measures, as concerns grow over the current UK economic outlook.
A report from the British Retail Consortium showed that shop-prices rose 1.7% year-on-year to August, as consumer prices accelerated. There was a muted reaction to this figure but the Pound gained further support, after a separate report from Halifax showed that UK house prices unexpectedly rose for a second month in August, as a strong second quarter performance helped drive demand.
The average cost of a home in the UK rose 0.2% from July, when it gained 0.7%, and the report will provide a sense of optimism that the decline in the housing sector has been exaggerated. Martin Ellis, an economist at Halifax, said in a statement yesterday that “the improved economy, strengthening labour market and low interest rates are all supporting housing demand.” However, he also acknowledged that “the pace of economic growth is unlikely to be sustained and prices will probably remain static this year.”
Although the UK economy grew at the fastest pace since 2001 in the second quarter, recent economic reports indicate that the recovery is slowing and may even result in a “double-dip”, as the government prepares to introduce the most drastic government spending cuts since the Second World War. The Bank of England is expected to leave interest rates on hold for the remainder of the year, but it remains to be seen whether the MPC will extend bond purchases.
Underlying confidence in the UK economy is likely to remain fragile, which will limit the scope for the Pound to make gains against the major currencies. Sterling has held firm against the Dollar this morning and has continued the upside momentum versus the Euro. However, the UK currency may struggle to sustain its rally, amid a report from the Office of National Statistics, which may show that industrial production declined in July.
Euro / US Dollar
The Euro remained under pressure against the U.S Dollar throughout the day and retreated to support levels below $1.2750. A weaker-than-expected German industrial orders report increased speculation that the recent rebound in growth could stall, which would also increase the wider Euro-zone risks. There were also further concerns over the Euro-zone banking sector, which continued to unsettle the Euro.
There was also a further widening of yield spreads within the area as yields in countries such as Portugal and Spain rose. The increase in bond yields will make it even more difficult for the weaker nations to finance budget deficits and will increase the cost of fiscal tightening. In this environment of risk aversion, the Euro will be vulnerable to further losses against the Dollar and the Yen.
There was a lack of U.S economic releases yesterday with underlying confidence in the economy remaining weak. The minutes from the Fed’s last policy setting meeting showed that two members voted for an increase in the discount rate this month, but the main focus is still on the possibility of further quantitative easing by the Federal Reserve.
Data Released 8th September
U.K 09:30 – Industrial Production (July) – Manufacturing Production
U.K 15:00 – NIESR GDP Estimate (3 Mths to August)
GER 10:00 – Industrial Production (July)
CAN 14:00 – BoC Interest Rate Announcement
U.S 19:00 – Federal Reserve Bank Publishes Beige Book
U.S 20:00 – Consumer Credit (July)
Related posts:
- Daily Foreign Exchange Rate Forecast – The Pound remained in the ascendancy yesterday
- Daily Foreign Exchange Rate Forecast – The Pound remained largely unchanged against both the U.S Dollar and the Euro yesterday
- Foreign Exchange – The Pound came under renewed selling pressure yesterday, as Sterling slumped back towards the support at 1.5550 against the Dollar
- Daily Foreign Exchange Rate Forecast – The Pound was subjected to further selling pressure towards the close of trading last night
- The Pound declined against the Euro yesterday, falling back under the technical support at 1.16
