by Adam Solomon
Sterling / Euro and US Dollar
The Pound declined against all of the 16 most actively traded currencies in early trading yesterday, as the UK currency tested key support around the 1.20 level versus the Euro. Sterling also dipped to lows near 1.5335 against the U.S Dollar, after a report from the Chartered Institute of Purchasing and Supply showed that UK manufacturing slowed to the weakest level in nine months, a further sign that the UK economic recovery peaked in the second quarter.
The revised GDP data for the three months to June showed that the UK economy grew at the fastest pace since 2001, but the government will release details of austerity measures on October 20th, which may cause a second recession and severely weaken the Pound. A number of Bank of England policy makers have expressed concern over the economic outlook, while the Deputy governor Charles Bean indicated that policy makers may be prepared to expand emergency stimulus measures.
James Knightly, an economist at ING Financial Markets, said that “it’s pretty disappointing stuff. With fiscal austerity measures going to be stepping up in the coming quarters, our base case is more subdued growth and weak inflation pressures. The first rate hike is at least 12 months away.”
The Pound fell as much as 0.4% against the U.S Dollar after the manufacturing data, while the UK currency also slumped versus the Euro. David Noble, chief executive officer at CIPS, said in a statement yesterday that “the looming public-sector cuts are keeping the UK manufacturers on tenderhooks and slowing the pace of the recovery. The government spending review in October should bring more clarity to the situation.”
Nevertheless, the Pound bounced back later in the day, as global stocks continued to rise, after China reported faster growth in Manufacturing for August. The Pound subsequently rallied against the U.S Dollar and Japanese Yen, as the FTSE 100 Index advanced for a fourth straight day, increasing investors’ appetite for riskier assets.
The benchmark FTSE 100 Index increased 2.7% on the day, the most since July 6th, to a three week high, after the U.S and Chinese manufacturing growth accelerated, easing concern that the economy will slip back in recession. David Jones, chief strategist at IG Index, said that “better-than-expected data have put some fire back into markets. The month has started well and has certainly set the tone for possible further gains, but only if they can be underpinned by decent numbers.”
The Pound has failed to consolidate on yesterday’s gains versus the Dollar, slipping back under $1.54 against the U.S Dollar, after a report this morning from the Nationwide Building Society showed that UK house prices fell the most in six months in August. The average cost of a home dropped 0.9% from the previous month, while prices increased just 3.9% from a year earlier, the weakest growth since November.
The UK housing market recovery has certainly lost some momentum this year, as the government prepares to introduce austerity measures designed to rein in the UK budget deficit. Recent reports have indicated that the property market is slowing, while consumer confidence deteriorates amid the lingering prospect of a double dip recession.
Euro / US Dollar
The Euro has also capitalised on renewed Dollar weakness, while the single currency also made significant gains versus the Pound, despite reports that growth in Europe’s manufacturing sector slowed in August, while export demand slumped to the lowest level in seven months. The recent data releases in the Euro-zone almost mirror the same trend in the UK, with some economists believing that the second quarter growth figures will represent the peak of the recovery this year.
While Europe’s economy expanded at the fastest pace in four years in the three months to June, companies have largely relied in export demand to boost sales. Stocks in Europe and the U.S have dropped in the past two weeks, amid concern that the global economic recovery is losing momentum.
Howard Archer, chief European and UK economist at Global Insight IHS, said that the recovery “is likely to remain bumpy and relatively gradual, while still pointing to decent manufacturing growth, the softer survey reinforces suspicion that Euro-zone manufacturers will find it increasingly difficult to sustain their impressive performance.”
The Dollar and the Japanese Yen both fell against the major currencies yesterday, while the Australian Dollar and other so-called higher-yielding currencies advanced due to the overall improvement in global risk appetite. Australia’s economy expanded last quarter at the fastest pace in three years, increasing speculation that the Reserve Bank will raise interest rates again next month.
Data Released 2nd September
U.K 07:00 Nationwide House Prices (August)
EU 10:00 Gross Domestic Product (Q2 Details)
EU 10:00 Producer Price Index (July)
EU 12:45 ECB Interest Rate Announcement
EU 13:30 ECB Press Conference
U.S 13:30 Initial Jobless Claims (w/e 28th August)
U.S 15:00 Factory Orders (July)
U.S 15:00 Pending Home Sales (July)
