by Adam Solomon
Sterling / Euro and US Dollar
Following on from last week, the Pound strengthened significantly against the Dollar and the Euro, as the overall improvement in global risk appetite diminished demand for the U.S currency as a refuge, while a government report showed that the number of Britons claiming jobless benefits declined in March by more than initial estimates.
A wider measure of unemployment climbed to the highest level in 16-years, although the number of people collecting jobless benefits fell 32,900 from February to 1.54 million, well ahead of initial forecasts. The data provides ammunition to both the Prime Minister Gordon Brown and David Cameron in the run-up to the May 6th General Election.
Brown is trying to gain ground in a three-way race for the election by arguing that the economic recovery is too fragile to tackle the record budget deficit. The Labour Party has lost support to Cameron’s Conservatives, who want to cut public spending immediately, and the resurgent Liberal Democrat Party, led by Nick Clegg.
Opinion polls published last week showed Labour slipping into third place, after a surge in support for the Liberal Democrats following Clegg’s performance in the first televised debate on April 15th. The result means Labour could win the most seats in Parliament and remain in power with the support of the Liberal Democrats in what would be the first Hung Parliament since 1974.
The unemployment data will fuel optimism that the Bank of England will have to raise interest rates at a faster pace than previously anticipated, while a report earlier this week showed that consumer prices breached the upper limit of 3% for the second time this year. The minutes from the Central Bank’s last policy meeting, also released on Tuesday, showed that the MPC voted unanimously to hold the bond-purchasing plan at £200 billion in April.
Some policy makers even expressed concern at the prospect of a prolonged bout of faster inflation. The Committee, led by the governor Mervyn King, decided to keep interest rates unchanged at a record low of 0.5%. Officials are trying to balance anemic growth against the threat of accelerating inflation and policy makers have suspended comment on policy prior to the election.
The Pound rose to the highest level in two months against the Euro on Thursday, breaching 1.1600, as the single currency came under renewed selling pressure following reports that the Greek budget deficit was actually wider than initial forecasts. The UK currency received a boost, after a report from the Bank of England showed that lenders increased home loans last month, adding to signs that the UK recovery is gaining momentum.
The Pound advanced against most of the 16 most actively traded currencies and for a third day versus the Swiss Franc. A separate government report showed that UK retail sales climbed for a second month in March on gains at department stores, another sign that the recovery is gathering strength ahead of the first quarter GDP data on Friday morning.
There is still a strong element of caution over consumer spending, as the prospect of a budget squeeze after the May 6th election is still overshadowing sentiment. Consumer confidence dropped last month by the most since July 2008, while unemployment reached a 16-year high of 2.5 million in the quarter through February.
Jeremy Stretch, a senior currency strategist at Rabobank International, said that “we’ve had this period when markets were incredibly bearish on the UK economy, and some of that has now ebbed. This should provide sterling with a degree of support.” The Pound strengthened to the strongest level against the Euro since January 29th.
The Pound came under pressure against the majors on Friday, after a report from the Office of National Statistics showed that the UK economy expanded by half as much as preliminary forecasts in the first quarter, highlighting the fragility of the recovery. Gross domestic product rose 0.2% from the final quarter of 2009, when a 0.4% expansion officially ended the recession.
The Prime Minister Gordon Brown told reporters on Friday that the economy still needs additional stimulus to avoid a “double-dip recession” and that the Conservatives’ plans to cut public spending are a “risk” to growth. The outright winner of the May 6th election will need to tackle a budget deficit that has swelled to the worst level since the Second World War in the fiscal year through March.
Stewart Robinson, an economist at Aviva Investors, said “this is disappointing. On the face of it, it’s a weak economy that got weaker in the first quarter. This number will without doubt be revised up but it won’t happen in time to help Brown.” The Pound fell 0.4% after the report, declining from the highest level in two months versus the Euro, slipping briefly under 1.15.
The kneejerk decline in Sterling sentiment didn’t last long and the Pound may strengthen to a two-month high against the U.S Dollar, after the UK currency remained above its 20-day moving average. According to Ueda Harlow Ltd, Sterling is also poised to extend gains after climbing above its 60-day moving average, a key level of resistance where sell orders may be clustered.
Toshiya Yamauchi, a senior foreign exchange analyst at the online currency trading company, said “technical charts are signaling an acceleration in rising momentum for the British currency. The currency may test $1.56 level, which represents the top of the cloud on a daily ichimoku chart.”
The political developments will also remain in focus this week and the latest opinion polls still suggest that Britain is heading perilously towards its first minority government in nearly 40-years. Sterling support will be fragile if there is continuing evidence of a deadlocked result, but selling pressure should be contained unless there are warnings over the credit rating outlook.
The Euro fell to the lowest level in almost a year against the Dollar last week, after the European Union said that Greece’s deficit was worse than previously estimated, increasing the prospect of the nation accepting a bailout. Moody’s Investors Service said that it downgraded the government debt ratings of Greece to A3 from A2. The U.S Dollar rose against most of its major counterparts, amid speculation that Europe’s debt crisis will deter demand for riskier assets.
Win Thin, a senior currency strategist at Brown Brothers Harriman & Co, said that “the only surprise is that Moody’s didn’t cut more. It’s quite absurd given where we are in terms of debt numbers and the cost of borrowing. The Euro’s heavy, and people are selling into rallies.”
The Euro dropped for a sixth straight day against the Dollar, decreasing 0.6% to $1.3305, after touching the lowest level since May 7th last year. The U.S new home sales data rose in March by the most in almost five decades, while durable goods orders surged. The Euro regained some ground against the Dollar on Friday, after Greece asked the EU and the International Monetary Fund to activate a bailout of up to €45 billion.
Data Released 26th April
U.K 00:01 – Hometrack House Prices (April)
- FX149 Foreign Exchange Daily Insight – The Pound continues to make gains, amid speculation of medium term rate increases
- FX174 Foreign Exchange Daily Insight – The Pound recovers after Sentance say central bank may need to raise rates
- FX143 Foreign Exchange Daily Insight – The Pound rebounds against the majors, after U.S job losses exceeds expectations
- FX077 Foreign Exchange Daily Insight – The Pound declines amid speculation UK banks will disclose more losses
- The Pound recovers some gains against the majors, amid an improvement in risk appetite