GBPEUR/GBPUSD
Following on from last week, the Pound declined against the Euro, while the UK currency dropped below its 200-day moving average versus the Dollar, amid concern that the UK’s fiscal condition is deteriorating, putting its sovereign credit rating at risk. Sterling fell through the pivotal $1.60 level for the first time since October 15th, falling to a low of $1.5922.
UK gross domestic product for the third quarter was revised marinally higher to a figure of -0.2%, from the -0.3% estimate previously, but the result was weaker-than-expected, with some speculation that there could be a figure of zero or better. The data had a small negative impact on the Pound, despite expectations of positive growth for the fourth quarter.
The Pound slumped below the moving average of $1.6013 against the U.S Dollar and Sterling is the only currency from the Group of Seven industrialised nations to move through its 200-day moving average versus the Dollar in the fourth quarter. Underlying confidence surrounding the UK debt position remains fragile and there is persistent speculation that there could be an important loss of confidence in 2010.
The Chancellor of the Exchequer Alistair Darling announced this month that banks would have to pay a one-time levy of 50% on discretionary bonuses of more than £25,000 they award. Fitch Ratings said in November that the UK’s sovereign credit grade is the most at risk among the top-rated nations and that Britain needs “the largest budget adjustment.”
The UK posted a 20.3 billion budget deficit in November, the largest on record since 1993, pushing the national debt above 60% of economic output. Hans-Guenter Redeker, head of global currency strategy at BNP Paribas SA, said “if the government doesn’t go ahead and consolidate the budget significantly, then they are going to run into severe trouble with regards the rating.”
BNP predicts that the Pound will slide 12.5% to $1.40 by the end of 2010, while the UK currency is expected to appreciate to $1.67 versus the Dollar. UK stocks advanced yesterday, extending the biggest annual rally since 1997, before reports that showed U.S consumer spending increased by more than anticipated.
Prior to the Christmas break, the Pound rose moderately against the U.S Dollar, amid signs that the global economic recovery is gathering momentum and stock markets advanced, reducing the allure of dollar denominated assets. The FTSE 100 Index climbed for a fifth straight day, becoming the first equity market among the biggest developed economic to recover its loss from Lehman Brothers Holdings Inc’s collapse.
The FTSE 100 Index rose 0.6%, which would be the highest closing position since September 12, 2008, the last session before Lehman filed the world’s biggest bankruptcy. The Standard & Poor’s 500 Index in the U.S and Japan’s Nikkei 225 stock average must rally 11% and 15% to rebound from their lowest point.
Elsewhere, the Confederation of British Industry raised its 2010 economic growth forecast for the UK three days ago and said that the Bank of England may pause its bond purchasing program in February. Brian Kim, a currency strategist at UBS AG, said “sterling can strengthen into the upcoming UK elections. But caution thereafter as we could see sterling weaken due to fiscal spending cut-backs.”
According to an article in the Daily Telegraph, citing a report from the Centre for Economics and Business Research, the Pound may fall below parity with the Euro because of the state of the country’s finances and concern about the government’s policies. Ratings companies are “looking for an excuse” to lower the UK government’s AAA credit rating, after Greece had its rating cut.
EUR/USD
The Dollar traded close to the highest level in more than three months against the Euro last week, after U.S consumer spending rose for the sixth time in seven months. The Euro attempted to rally earlier in the day, but gains soon attracted fresh selling pressures, as Moody’s Investors Services downgraded Greece’s credit rating, contributing to the negative sentiment for the Euro.
There was also a decline in German consumer confidence for the third consecutive month, while the IFO institute warned that credit availability for German companies had tightened in December, compared with the previous month. The U.S existing home sales data was stronger-than-expected, with a rise in the annualised selling rate to 6.54 million.
U.S third quarter gross domestic product was revised down to an annual rate of 2.2% from 2.8% previously, while the latest Richmond Fed Index returned to negative territory. Nevertheless, there was still some additional Dollar support on yield grounds, which helped maintain a firm tone for the U.S currency.
The Dollar was unable to make any significant ground against the Euro yesterday and weakened to lows beyond $1.44, before consolidating around $1.4385 by the close of trading last night. Trading conditions were inevitably subdued with much of Europe still on holiday following the Christmas break. There will be expectations of a further improvement in consumer confidence last month, which would tend to provide some support for the Dollar.
Data Released 29th December
U.S 14:00 – Case Shiller House Prices – (October)
U.S 15:00 – Consumer Confidence – (December)
written by Adam Solomon
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