by Adam Solomon
Sterling / Euro and US Dollar
The Pound slumped below $1.54 against the U.S Dollar yesterday, while UK government bonds rose, after further losses in global stocks boosted demand for fixed-income and the Dollar as a haven. The Pound stayed lower against the Dollar, as a report from the Bank of England showed that UK mortgage approvals added to the downbeat sentiment towards the property market.
The MSCI World Index dropped 0.1%, while the FTSE 100 Index of stocks slumped 1.4%, as risk aversion stalks the market and increases investors’ appetite for lower-yielding assets. Orlando Green of Credit Agricole Corporate & Investment Bank, said yesterday that “the mortgage data is not going to be a game-changer for the UK economy. You need something weightier than that.”
Approvals for home loans were largely unchanged from the previous month, which indicates that the housing market remains subdued, as the government plans to implement the biggest budgetary cuts in a generation. Lenders granted 48,722 loans to buy homes, compared with a revised 48,562 in June. A separate report from Hometrack ltd yesterday showed that home values fell in August by the most in 16 months.
Bank of England Deputy Governor Charles Bean said over the Bank holiday weekend that the UK economy remains in a fragile state and warned that officials may still expand emergency stimulus measures to help cement the recovery. Recent rhetoric from a number of BoE policy makers seems to emphasise a mood of caution within the MPC and an increase in UK interest rates appears to be a long way off.
Tighter lending conditions at banks and concern over the government spending cuts will weigh on economic growth this year and curb demand for property. Nevertheless, data released towards the end of last week showed that UK gross domestic product was revised slightly higher to 1.2% in the second quarter, the fastest pace of growth since 2001.
Other data releases have signaled that the UK economic recovery is faltering, amid the government’s commitment to rein in the budget deficit. The Office of National Statistics reported last week that investment by British businesses fell 1.6% in the second quarter. Bank of England policy maker Martin Weale was quoted in the Times as saying there is a “real risk” of a second recession.
Hans-Guenter Redeker, head of foreign exchange strategy at BNP Paribas SA, said that “the outlook for the UK economy and sterling is weakening. The housing market is turning around. That’s going to have a further negative impact on sterling.” Howard Archer, chief UK economist at Global Insight HIS, said that “the fundamentals are far from ideal for the housing market.”
Finally, investors at UBS AG have advised their clients to sell the Pound against the Swiss Franc in a bet that the UK currency will weaken to 1.50, the lowest level on record. The UK is expected to announce an austerity program on October 20th that will slash government departments’ budgets by a quarter to cut the deficit, which is currently more than 11% of gross domestic product.
Euro / US Dollar
The Euro bounced back against the Pound and the Dollar yesterday, despite the degree of weakness in the Euro-zone economies. A report showed that European inflation slowed this month, while unemployment held at the highest in almost 12 years in July. Consumer prices rose just 1.6% year-on-year last month, while the jobless rate held steady at 10% for a fifth straight month, the highest level since August 1998.
The resilience in consumer prices will maintain concerns over inflationary pressures becoming entrenched in the broader economy. Oil prices have slumped 9.6% over the past month, leaving households with more disposable income to spend, just as a global export led recovery shows signs of weakening.
European Central Bank governing council member Axel Weber said on August 27th that economic growth will “moderate.” Nick Kounis, chief euro-region economist at ABN Amro NV, said “the first half of the year was of course impressive, but we can’t help but feeling that it’s not going to last. Domestic pricing pressures remain very weak and the labour market will likely remain flattish.”
Data Released 1st September
U.K 09:28 – CIPS Manufacturing PMI (August)
EU 08:58 – Markit Manufacturing PMI (August)
U.S 13:15 – ADP Employment (August)
U.S 15:00 – Construction Spending (July)
U.S 15:00 – ISM Manufacturing (August)
Related posts:
- 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 – The Pound remained in the ascendancy yesterday
- Foreign Exchange – The Pound came under renewed selling pressure yesterday, as Sterling slumped back towards the support at 1.5550 against the Dollar
- Foreign Exchange Daily Forecast – The Pound rallied against the Euro yesterday
- Daily Foreign Exchange Forecast – The Pound traded towards the lowest level in four weeks against the U.S Dollar yesterday
