GBP/EUR
The pound rose to its highest level against the Euro since 7 November 2008 as global stock markets fell sharply on renewed concerns over the European banking sector.
Investors are apprehensive ahead of a deadline this week for Euro zone banks to repay loans taken out a year ago at low interest rates.
As a result, leading stock markets were hit hard, with the UK’s FTSE 100 slipping 3.1%, France’s Cac 40 losing 3.6% and Germany’s Dax falling 3.1%.
The European Central Bank will offer funds on Wednesday to banks looking to repay 442bn Euros worth of loans later this week.
“Markets are tense going into the end of the long-term refinancing programme, along with Wednesday’s three-month auction,” said John Hydeskov, senior currency analyst at Danske.
Last summer, the ECB was forced to offer European banks cheap 12-month loans to help them through the financial crisis. This was a longer repayment term than the usual three to six months.
But the ECB has said it will not offer 12-month loans this time around, raising fears that European banks may again face funding difficulties.
So with heightened concerns about which banks still have bad loans on their books, there is a growing fear among investors about the health of the European banking sector.
The pound, in the short term, is benefiting from all this as fears among credit ratings agencies and investors about the UK’s burgeoning budget deficit have been allayed by last week’s Budget, in which the new coalition government announced stringent measures to cut spending and increase taxes to reduce debt levels.
The pound also benefited from recent comments made by Bank of England Monetary Policy Committee (MPC) member Andrew Sentance in which he said the UK would need to start raising interest rates soon.
Mr Sentance voted to raise rates at an MPC meeting earlier this month.
Analysts said that if inflation remains well above the Bank’s 2% target rate, the pressure to raise rates will increase.
Inflation, as measured by the Consumer Prices Index, currently stands at 3.4%.
“If inflation expectations show further signs of rising, and if nominal demand remains robust, we think the MPC will become increasingly uncomfortable with the current loose policy setting,” said Barclays Capital.
Higher interest rates make the pound a more attractive investment and tend, therefore, to increase its value.
In the short term, the pound may also gain as today’s scheduled publication of the final GDP figure for Q1 in the UK has been delayed for ‘technical reasons’ until 12 July. Some analysts had predicted earlier on this week that the provisional rate of 0.3% may be scaled back in the final figure undermining confidence in the UK economic recovery.
House prices in the UK rose again in June but only by 0.1%, according to the Nationwide building society.
The rise follows a 0.5% increase in May, with the average property in the UK now costing more than £170,000.
Prices have risen by 3% since the start of the year, the Nationwide’s house price index showed.
However, the rate of annual house price inflation fell again to 8.7%, with prices rising more slowly than they did this time last year.
Commenting on the figures, Nationwide’s chief economist Martin Gahbauer said the slowdown may be due to an increase in the number of properties up for sale.
The pound’s recent gains may however be short lived as UK banks must replace £800bn of funding by the end of 2012, at a rate of £25bn a month – more than double the £12bn monthly rate so far this year.
Some £285bn of the funding is emergency support provided during the crisis, which the industry wants extended but the Bank of England is adamant will not be.
In addition, cuts announced in the Budget could lead to up to 1.3 million jobs being lost by 2015, a newspaper report claims.
The Guardian says leaked Treasury figures predict that up to 120,000 public sector jobs and 140,000 private sector jobs could disappear annually for the next five years.
Labour figures said the true cost of George Osborne’s Budget was now clear.
But the government said independent experts expect “unemployment to fall in every year and employment to rise”.
The Guardian says the figures come from a slide which was part of a Treasury presentation on the Budget.
It claims the Chancellor would have seen the presentation before delivering his Budget last week.
A Treasury spokesman said last night that the department could not immediately confirm or deny whether the slide was genuine.
In response to the Guardian story, the Treasury cited a report by the independent Office for Budget Responsibility, set up by Mr Osborne, which predicts that unemployment will peak this year at 8.1% and then fall in each of the next four years to reach 6.1% in 2015.
GBP/USD
Poor US consumer confidence figures and fresh concerns over euro-zone fiscal problems ahead of massive bank repayments to the European Central Bank this week sent the Dow Jones sharply lower in New York to close 2.65% down and below 9,900 points.
The S&P 500 fell to within striking distance of its 2010 intraday low, which analysts said could trigger further declines. The index is on course to close at its lowest level since November — another bearish signal for markets.
The equity sell-off was broad and deep in a continuation of a wave of selling that started in Asia overnight and then moved into Europe. Economically sensitive sectors such as materials, industrials and financials bore the brunt of the selling.
U.S. consumer confidence dropped sharply in June, after rising for three months, on worries about the labour market, according to a report from the Conference Board. The news fed fears of an economic slowdown after recent weak data from the housing and job markets.
Fears about the strength of the banking system surfaced again, with investors worried about a potential liquidity shortfall of more than 100 billion Euros in the financial system as European banks repay 442 billion Euros ($545.5 billion) in emergency loans on Thursday.
Tom Forester, fund manager of the Forester Value Fund, said “People are now starting to figure out that growth is going to be a little slower than people had expected,” he said from Lake Forest, Illinois. “Stimulus goes flat, I think, next quarter and the inventory rebuild is over.”
As a result, the pound lost ground against the dollar, Japanese Yen and Swiss Franc, all seen as ‘safe haven’ currencies in the markets.
GBP/High Yielding Currencies
In the US, the Conference Board corrected its leading economic index for China to an April gain of 0.3% from a previously reported rise of 1.7%, a sharp revision that undermined confidence in China’s ability to sustain strong growth.
The correction prompted investors to turn against riskier assets, adding to a global sell-off. The Shanghai composite index fell 4.3 percent to a new 14-month low.
“The hint of moderation is what alarmed markets as it comes in the context of fragile U.S. and European economies at the time we look to Asia as the global economic savior,” said Peter Boockvar, equity strategist at Miller Tabak + Co in New York.
The CBOE volatility index VIX, known as Wall Street’s fear gauge, rose 16% to a session high of 34.69, its highest level since early June.
The worldwide move to risk aversion also showed in the commodity markets with oil falling over 3% to under $76 a barrel but gold reaching a new high of $1245 per troy oz. This allowed the pound to reach multi month highs against the Australian Dollar and rise significantly against the New Zealand Dollar and South African Rand.
Data Released 30th June
UK 00:01 – GfK Consumer Confidence (June)
UK 07:00 – Nationwide House prices (June)
GER 09:00 – Unemployment (June)
US 13:15 – ADP employment (June)
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