by Adam Solomon
Sterling / Euro and US Dollar
The Pound initially gained some support against the Dollar yesterday in the foreign exchange markets, rising towards $1.5150 in London before a sharp retraction later in the day. The UK currency also peaked just above 1.11 versus the Euro, as a general improvement in risk appetite underpinned support. Political uncertainty remained an important factor, with the latest opinion poll still pointing to the risk of a minority government.
There will be continuing concerns that political factors that may prevent any significant short-term corrective action on the escalating UK budget deficit. Speculation surrounding a hung parliament will weigh heavily on Sterling in the build up to the election and the UK currency slipped back towards the major support levels at $1.50 against the Dollar and 1.10 versus the Euro.
The Pound failed to find any buying support later in the session, despite comments from Bank of England policy maker Kate Barker, who unexpectedly expressed some optimism that the UK economy is recovering. The differing views from a number of committee members is becoming increasingly apparent over the past few weeks, which will tend to deter strong sterling support.
In a speech to the National Institute of Economic and Social Research, Barker said that “there are grounds for optimism from recent data that the recovery is broadly on track. I don’t think it is yet possible to be confident in the pace of the recovery and still expect the path to be bumpy. But some of the severe downside risks have diminished.”
The Bank of England’s unprecedented £200 billion asset purchase program has helped the economy rebound from the longest recession on record by cutting costs, supporting asset prices and boosting confidence. Barker also said that the Central Bank kept the plan’s size on hold for a second month last week, as officials adopt a “wait and see” policy.
Her comments yesterday seem to lean towards further quantitative easing as she said that “I don’t consider the evidence suggests that this rise in asset prices has gone too far and therefore do not believe that this has become another risk to future economic stability. My concern is that this channel might become less powerful if quantitative easing were to be extended.”
UK stocks advanced yesterday, extending the biggest weekly jump since July for the FTSE 100 Index, which rose 0.1% in London. UK stocks have rallied 11% since February 5th, as UK companies, including Barclays Plc and RBS reported earnings that beat analysts’ estimates and investors speculated that the European Union will bailout Greece.
The French President Nicolas Sarkozy said that the Euro-zone is ready to support Greece should the government struggle to fund its budget deficit, arguing that the country is “under attack” from speculators. In the UK, underlying confidence in the debt position is also under scrutiny and the Pound dropped to lows against the majority of the 16-most actively traded currencies.
According to Goldman Sachs Group Inc, the Pound’s drop last week to the lowest level in 10-months against the Dollar may help the UK economy recover faster than the Euro-zone. Concerns over the UK elections this may result in the first minority government since 1974 and has contributed heavily to the Pound’s 7% decline since December.
Erik F. Nielson, chief European economist at Goldman Sachs, said that “people are very bearish on the UK, probably more than they should be. The Euro is clearly in its biggest crisis since it started, so it’s kind of strange that it’s overvalued.” The Pound dropped to the support at 1.10 versus the Euro last night and break below this level could spark a move towards 1.0750.
The Pound posted its third weekly decline against the Euro and the U.S Dollar on March 5th, as opinion polls stoked concern that the UK may elect a minority government, hampering efforts to rein in the budget deficit. National elections must be held by June and at more than 12% of gross domestic product, the UK budget gap is on a par with that of Greece.
The UK economy exited the recession in the fourth quarter, expanding just 0.3%, while inflation accelerated to the fastest pace in 14-months to 3.5% in January. Nielson added, “we think the UK will outperform the Euro-zone in growth terms. We have a constructive forecast for Sterling.” Goldman Sachs forecast that the Pound will rise to $1.73 in six months.
Euro / US Dollar
The Euro struggled to hold on to recent gains against the Dollar yesterday, after the Greek Prime Minister George Papandreou said that the nation’s fiscal crisis could spread beyond Europe unless “unprincipled speculators” are reined in. The Euro dipped to lows close to $1.36 against the Dollar during the U.S session before stabilising around $1.3625 at the close of trading last night.
The economic data with the Euro-region was largely mixed, as the Sentix business confidence index was slightly stronger-than-expected for March. There was also a surprising increase in German industrial orders but the overall market impact was muted. The improvement in risk appetite failed to sustain the initial optimism surrounding the Euro, as there were further downgrades for Portugal’s main banks.
There were no major U.S economic data releases during the day and the Dollar gained support after the comments from the Greek Prime Minister. Former Federal Reserve Chairman Paul Volcker said that he was confident that the Euro would survive but the lack of a unified government to back up the ECB is a “structural crack”.
Data Released 9th March
EU 09:30 – Sentix Investor Sentiment Index (March)
GER 11:00 – Industrial Production (January)
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