GBPEUR/GBPUSD
Following on from last week, the Pound rallied against the U.S Dollar on Wednesday, climbing by the most in more than a week, after a report from the Office of National Statistics showed that UK gross domestic product contracted by less than previous estimates in the third quarter. GDP fell 0.3% from the previous three months, compared with a prior measurement of 0.4%, as slumps in manufacturing and services eased.
The government is fighting the worst unemployment rate in 14-years and the resilience in consumer spending is unlikely to last, which could severely undermine the economic recovery. The Bank of England have maintained UK interest rates at the lowest level on record and expanded the quantitative easing program on three occasions since March.
The governor of the Central Bank Mervyn King made a statement to the Treasury Select Committee yesterday and reiterated that a weak Pound is helping towards sustaining the economic revival. King also maintained that additional stimulus measures have ensured Britain’s escape from the recession but the recovery isn’t “particularly strong.”
Steven Barrow, head of Group of 10 currency strategy at Standard Bank Plc, said that “sentiment toward the Pound is pretty poor and I expect it to weaken further. It looks as if we have the possibility of further quantitative easing from the Bank of England whereas all the sounds coming out of the European Central Bank are about whether they need to tighten.
The Pound declined to the lowest level in a month against the Euro on Thursday, while the UK currency also lost 1.2% in value versus the U.S Dollar, after UK stocks declined and encouraged investors to seek the security of safe haven assets. The FTSE 100 index plunged 2.7% in London and headed for its steepest drop since May 21st.
The London Stock Exchange Group Plc, whose largest shareholder is Borse Dubai Ltd dropped by the most in eight months, after a proposal by Dubai to delay debt payments triggered the biggest sovereign defult since 2001. HSBC Holdings Plc, a lender to Dubai World, led a retreat among banking shares, while technical problems halted trading in London for more than three hours yesterday.
David Buik, a markets analyst at BGC Partners, said “certainly the Dubai debacle and the uncertainty that is has created has had a severe knock-on effect on European equity markets. This is not the end of the world for Dubai but it is a hammer blow.” The cost of protecting government notes from Qatar and Saudi Arabia rose by the most since June, as Dubai World, with $59 billion of liabilities, sought a “standstill” agreement from creditors.
Dubai borrowed $80 billion in a four year construction boom that reduced its reliance on falling oil supplies and created the region’s tourism and financial hub. HSBC Holdings Plc declined 5.3% yesterday, while the FTSE 350 Banks Index plummeted 5.8% to record the steepest decline since May. Dubai’s world lenders include Lloyds Banking Group Plc, Royal Bank of Scotland Group Plc and Barclays Plc.
The aggressive swings in risk sentiment continue to be the driving force in financial markets and the Pound is under pressure as equities slide. The UK currency may continue to decline against risk sensitive currencies like the Dollar and the Japanese Yen. The Pound also came under pressure yesterday, after Bank of England policy maker Andrew Sentence said that it’s “premature at the moment” to discuss raising interest rates.
Ian Stannard, a senior currency strategist at BNP Paribas SA, said “there are concerns with regard the extent of the UK banking sector exposure in Dubai so that is weighing on Sterling. The underlying picture for Sterling was already fundamentally weak and this news adds to the negative picture.”
Stannard also added that the Pound could fall to $1.57 over the coming weeks and Dollar buyers would be well placed to take advantage of the current rate, after 1% drop in the UK currency yesterday. The UK currency declined 0.6% against the Euro and broke through support at 1.10, despite reports from
the Confederation of British Industry, showing that an index of retail sales rose to the highest level in two years.
The Pound declined to the lowest level since November 3rd against the Dollar on Friday, as the FTSE 100 Index recorded its second week of losses. Goldman Sachs Group Inc downgraded retailers and Dubai’s attempts to reschedule its debt continued to scare investors. The Pound plunged to a low of $1.6287 against the Dollar and may continue to slide over the coming weeks.
Paul Robinosn, a currency strategist at Barclays, said that “at the moment the Pound is being driven by global attitudes to risk. It’s obvious that the economy has shrunk more than government forecasts suggested.” Barclays remain “relatively optimistic” about the outlook for the Pound and still forecast that the UK currency will hit $1.64 against the Dollar and 1.1365 versus the Euro by March.
The Pound may remain on the back foot this week, ahead of the Bank of England interest rate announcement on Thursday. Investors will be looking to the UK’s November manufacturing and services PMIs for direction, but the UK currency remains vulnerable to speculation surrounding additional quantitative easing and the spike in risk aversion.
EUR/USD
The Dollar rallied against 14 out of the 16 most actively traded currencies last week, after Dubai’s attempt to reschedule its debt encouraged investors to seek the security of so-called safe haven assets. The U.S currency remained largely unchanged against the Euro, gaining towards $1.4950 in New York, from a low of $1.5144 on Wednesday, the weakest level since August 2008.
Geoffrey Yu, a currency strategist at UBS AG, said yesterday that “markets took it as the Fed gave a green light to sell the Dollar. At the same time, it seems that all central banks are sounding a bit more positive.” The Euro retreated from a 15-month high amid speculation that the single currency has risen too quickly and traders adjudged the move as overdone.
Following last week’s increase in risk aversion, investor’s appetite could be the key feature this week, with the Dollar and the Japanese Yen the biggest gainers. Mounting concerns over Dubai’s debt position will be the driving force in financial markets this week, preventing the Euro from mounting a further challenge above the $1.50 level.
Data Released 30th November
U.K 00:01 Gfk Consumer Confidence (November)
U.K 00:01 Hometrack House Prices (November)
U.K 09:30 Consumer Credit (October)
U.K 09:30 Mortgage Applications (October)
EU 10:00 Flash HICP (November)
U.S 14:45 Chicago PMI (November)
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