by Jon Beddell
Foreign Currency Market Update – GBP / EUR Update
Sterling lost two cents last week to close on Friday below the key psychological 1.20 level. We spent all of yesterday’s session below there, but are trading nearly a cent better this morning as the Euro came under pressure following a Wall Street Journal article which undermined the credibility of last month’s European bank stress tests. The article said that the tests underestimated some lenders’ holdings of potentially risky government debt, stoking investor concerns over the single currency. This comes on the heels of a report from Germany’s banking association yesterday indicated that the country’s largest banks may need an additional €105bn to meet tougher regulatory capital requirements.
Economic data has been a mixed bag over the last week. Bad in the UK, and a little better in Europe! On our side of the channel disappointing manufacturing and construction data was compounded by a horrible service sector report that showed activity growing at the slowest pace since April 2009. The service sector PMI gauge fell to 51.3 in August from 53.1 the previous month. A figure below 50 indicates sector contraction. The service sector is watched particularly closely because it represents over 70% of UK economic output, and is a key barometer for the Bank of England’s interest rate setting monetary policy committee (MPC). They meet on Thursday to make their latest interest rate decision, where they will certainly keep interest rates on hold at 0.5%. The weak PMI figure is likely to push them toward an easing bias, with some analysts now speculating that further Quantitative Easing could be in the pipeline. We will get some indication of the MPC’s thinking when the meeting minutes are released a few days after Thursday’s vote. In Europe the equivalent service sector report was slightly better than expected with a headline reading of 55.9, with notable strength in France and a contraction for Spain (the first since Feb’ 2010). All in all the Euro benefitted.
The Pound took a knock last week but we maintain a positive bias. Sterling broke below trend support and also failed to hold the 1.20 level. However, the market is still clearly in an upward trend, and this would only be called into question if we break below the July low at 1.1730. If today’s strength can be sustained then Sterling may be forming a new “higher low” here, but that remains to be proven.
Related posts:
- Euro Update – Sterling declined another 2 cents since last week’s special update
- GBP NZD exchange rate is now testing all time lows
- Foreign Exchange Euro Update – Sterling Plunges on Election Worries
- Euro Update – Sterling’s apparent strength was more a case of Euro weakness
- Euro Update – Sterling slipped back to support last week
