The Pound continued to decline against the majors yesterday, briefly falling through the major support level of 1.4250 versus the Euro to record the lowest level of exchange since April 2006 despite a slightly stronger-than-expected report on the UK economy.
The final estimate of gross domestic product showed that economic growth had accelerated 3.1% in the second quarter with the upward revision coming from the expansion in services and a pick-up in manufacturing.
Therefore, the UK economy is heading for the fastest pace of expansion in three years but may begin to slow in 2008 following the collapse of the U.S subprime mortgage market, which has caused turmoil in financial markets around the world.
Despite the seemingly positive report on the UK economy, the Pound declined against both the Euro and the Dollar amid reports that commercial Banks in the UK sat out the Bank of England’s three-month money auction and neglected to borrow emergency funds at a penalty rate.
The government was forced to release a significant amount of liquidity earlier this month in response to uncertainty surrounding the UK’s fifth biggest mortgage lender, Northern Rock plc. However, the report yesterday shows that bank’s may be finding it easier to borrow money after market interest rates fell to the lowest level since the start of the credit market slump.
The Euro rose to yet another record high against the ailing U.S Dollar yesterday despite reports that business confidence has suffered greatly as a result of the recent turmoil in financial markets, the U.S economic slowdown, and the prospect of a further tightening of Euro-zone interest rates.
Newspapers across Europe have highlighted the risks that a strong currency will have on the economy as a whole, particularly demand from overseas, with Europe being a largely export dependent nation.
Reports this morning showed that consumers are also becoming overly pessimistic as European retail sales slowed dramatically in September, led by the sharpest drop in Italy for two years.
An gauge of retail growth slipped to a seasonally adjusted 50.5 this month from 51.0 in August as European consumers are becoming more reluctant to increase spending after the rising cost of credit clouded the outlook for economic expansion.
The Euro may continue to test the major support levels against the Pound and look to make new record highs versus the Dollar amid the release of the preliminary estimate of German consumer prices, unemployment and Euro-zone money supply.
The relentless decline of the U.S Dollar has continued over the past trading session as the U.S currency fell to a record 1.4160 against the Euro and has also traded back above 2.0200 versus the Pound ahead of the latest round of housing numbers this afternoon.
In terms of economic data, the Dollar came under renewed pressure yesterday as a report from the Commerce Department showed that U.S durable goods orders had fallen by the most in seven months in August.
Orders had declined by more that the 4.9% anticipated after a revised 6.1% gain the previous month as industrial demand looks set to cool even as exports climb and inventories remain reduced.
Elsewhere, the Dollar stayed on the back-foot as speculation continues to mount that the Federal Reserve will be cutting interest rates again this year with Fed fund futures currently pricing in a 70% chance of a rate cut in October.
The report this afternoon on new home sales will go a long way to confirming or denying that assumption with sales expected to fall to the lowest level in seven years in August. Purchases of new property may fall to an annual rate of 825,000 last month as the report follows an earlier index of existing home sales, which dropped to a five-year low over the same period.
Following on from last week, the Pound dropped to the lowest level in well over a year versus the Euro but managed to claw back above the $2.00 barrier against the Dollar as an unexpected rise in retail sales offset criticism of the BoE governor, Mervyn King. With the pace of consumer spending showing few signs of slowing, the UK economy may continue to expand at a moderate pace despite heightened concerns over sentiment following the Northern Rock fiasco. In a speech to the UK treasury select committee, King was forced to vigorously defend his handling of the Northern Rock bailout as the Central Bank finally released over £10 billion in emergency funds to prevent a liquidity crisis. The Pound may continue to decline against the Euro over the coming week despite signs that the downward momentum may have subsided for the time being. Following the problems at Northern Rock, concerns about the banking sector are growing and that may undermine Sterling sentiment in the short-term amid speculation that the Bank of England will need to cut UK interest rates.
The Dollar has fallen to the lowest level on record against the Euro and bounced back above 2.0200 versus the Pound following the Federal Reserve’s decision to cut interest rates by 50 basis points last week. The U.S currency has continued to decline against 15 out of 16 of the most actively traded currencies as rumours circulate that the Fed will lower interest rates again before the turn of the year with a 70% chance of rate cut next month. The latest round of economic reports have shown an unexpected rise in jobless claims, sagging retail sales and a morbid outlook for the U.S housing market. Therefore the focus this week will fall on the U.S home sales data, which is expected to show that the depth of the subprime mortgage crisis is intensifying the housing recession while a number of key Fed policy makers are due to speak this week.
The positive sentiment surrounding the Euro has continued to gather momentum over the past week as the single currency rallied above 1.4100 against the Dollar and to the highest level ever recorded. The Euro also made significant gains versus the Pound, dropping briefly under 1.4300 to test the highs from April 2006 amid speculation that the ECB could raise interest rates by a further 25 basis points this year. Despite the increased level of volatility surrounding financial markets of late, the ECB’s governing council have retained a tightening bias as the chairman of the Central Bank stated that “upside risks” to inflation remain a concern to policy makers. At the present time only a verbal intervention from the chairman of the ECB, Jean-Claude Trichet or a spate of negative economic reports could seemingly slow the Euro’s unprecedented rise against both the Pound and the Dollar. In terms of data, we are have already seen some signs of instability as Service sector growth in the Euro-region dropped from a reading of 58.0 in July to 54.0 last month. While elsewhere, the Purchasing Managers’ index of European manufacturing showed that growth in output also slowed in August. The focus this week will invariably fall on the German IFO sentiment index, which is expected to highlight that the recent problems in the U.S combined with credit market turmoil and a rising Euro are beginning to weigh on business confidence.
Following on from last week, the Pound dropped to the lowest level in well over a year versus the Euro but managed to claw back above the $2.00 barrier against the Dollar as an unexpected rise in retail sales offset criticism of the BoE governor, Mervyn King. With the pace of consumer spending showing few signs of slowing, the UK economy may continue to expand at a moderate pace despite heightened concerns over sentiment following the Northern Rock fiasco. In a speech to the UK treasury select committee, King was forced to vigorously defend his handling of the Northern Rock bailout as the Central Bank finally released over £10 billion in emergency funds to prevent a liquidity crisis. The Pound may continue to decline against the Euro over the coming week despite signs that the downward momentum may have subsided for the time being. Following the problems at Northern Rock, concerns about the banking sector are growing and that may undermine Sterling sentiment in the short-term amid speculation that the Bank of England will need to cut UK interest rates.
The Dollar has fallen to the lowest level on record against the Euro and bounced back above 2.0200 versus the Pound following the Federal Reserve’s decision to cut interest rates by 50 basis points last week. The U.S currency has continued to decline against 15 out of 16 of the most actively traded currencies as rumours circulate that the Fed will lower interest rates again before the turn of the year with a 70% chance of rate cut next month. The latest round of economic reports have shown an unexpected rise in jobless claims, sagging retail sales and a morbid outlook for the U.S housing market. Therefore the focus this week will fall on the U.S home sales data, which is expected to show that the depth of the subprime mortgage crisis is intensifying the housing recession while a number of key Fed policy makers are due to speak this week.
The positive sentiment surrounding the Euro has continued to gather momentum over the past week as the single currency rallied above 1.4100 against the Dollar and to the highest level ever recorded. The Euro also made significant gains versus the Pound, dropping briefly under 1.4300 to test the highs from April 2006 amid speculation that the ECB could raise interest rates by a further 25 basis points this year. Despite the increased level of volatility surrounding financial markets of late, the ECB’s governing council have retained a tightening bias as the chairman of the Central Bank stated that “upside risks” to inflation remain a concern to policy makers. At the present time only a verbal intervention from the chairman of the ECB, Jean-Claude Trichet or a spate of negative economic reports could seemingly slow the Euro’s unprecedented rise against both the Pound and the Dollar. In terms of data, we are have already seen some signs of instability as Service sector growth in the Euro-region dropped from a reading of 58.0 in July to 54.0 last month. While elsewhere, the Purchasing Managers’ index of European manufacturing showed that growth in output also slowed in August. The focus this week will invariably fall on the German IFO sentiment index, which is expected to highlight that the recent problems in the U.S combined with credit market turmoil and a rising Euro are beginning to weigh on business confidence.
The Pound lost further ground against the Euro yesterday but rallied back above the $2.00 barrier versus the Dollar as a host of positive economic reports offset the criticism of the Bank of England governor, Mervyn King, as he explained the Central Bank’s reaction to the Northern Rock fiasco.
The Pound received an unexpected and timely boost as UK retail sales rose 0.6 in August following a 0.7% increase the previous month and it seems that higher borrowing costs did little to dampen spending.
The pace of sales was expected to remain unchanged last month but rising house prices and a buoyant labour market are encouraging consumers to borrow and spend with the national debt ever increasing to a record £1.3 trillion.
Elsewhere, the Pound received further support as UK mortgage approvals and monetary supply were also unexpectedly strong but the statement from Mervyn King certainly hampered sentiment. In a speech the UK Treasury select committee, the governor of the Bank of England defended his handling of the Northern Rock bailout and blamed British and European Union laws for hampering the Bank’s ability to prevent the worst banking crisis since 1973.
In addition, King extended an extra £10 billion in liquidity to the banking system yesterday, bringing down the three month lending rates and reversing his earlier decision to avoid helping commercial banks in need of emergency funding.
Despite the apparent lack of fundamental data released yesterday, the Euro managed to hold well above the 1.4000 level versus the Dollar and continued to make gains against the Pound as we hover just above that 1.4250 level from April 2006.
Just two years ago, the Euro was trading under 1.2000 against its U.S counterpart and the overwhelming strength of the single currency will certainly begin to slow the European economy in the months ahead.
Since the Euro-zone is so heavily dependent upon export growth, a weak currency will inevitably attract investment from overseas and thusly propel economic expansion while a strong Euro will slow it.
As a result, European economic data is likely to deteriorate in the months ahead as the 1.4000 level against the Dollar begins to have an impact on the overall economy. That may alter the ECB’s monetary outlook and prevent policy makers from raising rates beyond 4.0% despite rising oil prices stoking inflationary pressures.
The Euro may struggle to make further gains today as the focus falls on the flash estimate of the Purchasing Managers’ index on manufacturing and service sector growth. The report may show a modest contraction in September with manufacturing shrinking to a reading of 54.0 from the previous month, although a figure above 50 indicates expansion.
The overwhelming decline of the Dollar continued to gather momentum yesterday as the U.S currency sank to the lowest level on record against the Euro and a fresh 31-year low versus the Canadian Dollar amid speculation that the Fed will continue cutting interest rates.
The renewed weakness in the Dollar came in the aftermath of a statement from the Fed chairman, Ben Bernanke, who said yesterday that a sell-off in credit markets could intensify the housing recession.
The FOMC took the unprecedented step of cutting U.S interest rates by half a percentage point on Tuesday and may need to ease rates to 4.25% this year in order to prevent the collapse of the subprime mortgage market from the pushing the economy into recession.
Fed fund futures show a 72% chance of a further quarter-point rate cut in the October meeting, bringing the monetary policy of Europe and the U.S ever closer together. Elsewhere, Dollar sentiment was further hampered after an index of leading U.S economic indicators fell by the most in six months in August following lower consumer confidence and a rise in unemployment claims.
The Pound continued to decline against the Euro yesterday, trading through 1.4300 as we look set to test the major support level at 1.4250, the lowest since April 2006, amid growing evidence that the Bank of England will eventually need to cut UK interest rates.
Although the fiasco surrounding Northern Rock has been the catalyst to a major sterling sell-off, a report yesterday indicated that the Bank of England was already concerned about the outlook for the economy and inflation even at the beginning of the month.
Earlier this week, the latest round of inflation numbers showed that consumer prices had dipped again in August while the Bank of England released a statement yesterday saying that the upside balance of risk to inflation had receded.
The minutes from the Bank’s last policy meeting showed that the monetary policy committee had voted unanimously to hold interest rates in September, saying that “the outlook was now more uncertain”.
The particularly dovish tone of the accompanying statement seems to suggest that the MPC are shifting towards a possible rate cut by the turn of the year as the impact from the credit crisis continues to weigh on sentiment. As a result, the Pound is falling against the majors and is likely to continue to downward momentum ahead of a report this morning, which is expected to show that retail growth failed to accelerate in August.
The Euro has risen to the highest level in almost 18-months versus the Pound and overnight we broke through the 1.4000 barrier against the U.S Dollar to record a fresh all-time high of 1.4065.
Despite the increased level of volatility in financial markets throughout the world, the European Central Bank has retained a tightening bias and the diverging interest rate expectations in Europe and the U.S is making the single currency a far more attractive and somewhat safer commodity than the Dollar.
In addition, economic fundamentals in Europe remain positive with the only piece of data released yesterday showing that producer prices slowed modestly in August. The report represents an early indicator of price pressures in Germany, which were largely in line with initial forecasts, rising 1.0% from this stage last year led by lower costs for energy.
In the wake of the Fed’s decision to lower U.S interest rates by half a percentage point, the Dollar has plummeted to a fresh record low against the Euro and pushed back through the $2.00 barrier versus the Pound.
The U.S currency fell against 15 of the 16 most active currencies in the market yesterday amid speculation that the Federal Reserve will cut the benchmark lending rate further after the first reduction since June 2003.
The Dollar also came under intense pressure ahead of a speech from the Fed chairman, Ben Bernanke, later today who is expected to tell a congressional hearing that the U.S housing slump is threatening the pace of economic growth.
Elsewhere, a spate of economic data also hampered dollar sentiment as U.S consumer prices unexpectedly fell for the first time in a year last month following a decline in fuel costs. The report from the labour department showed that prices decreased 0.1% in August as slowing growth and weaker consumer spending are keeping companies from increasing prices.
The Dollar fell against both the Pound and the Euro last night following the Federal Reserve’s decision to lower its benchmark interest rate by half a percentage point in an attempt to pre-empt an economic slump and thusly spur the biggest rally in U.S stocks since 2003.
The chairman of the Fed, Ben Bernanke, has seemly adopted the same approach as his predecessor Alan Greenspan in reducing rates to avoid a slump rather than waiting for one to occur. The unprecedented decision to lower rates by 50 basis points has followed the increased turmoil surrounding credit markets in the wake of the U.S subprime mortgage crisis, which has threatened to curb the pace of global growth.
The cut may also help alleviate the worst housing recession since 1991 while the Fed also cut the discount lending rate and provided the biggest confidence boost to financial markets that investors could have hoped for.
In the accompanying statement, policy makers, who voted unanimously to lower rates by half a percent, took a non-committal stance on future policy and left the door open for further monetary easing.
Therefore, Fed fund futures are currently pricing in another 50 basis point cut before the end of the year as the risks to economic growth clearly outweigh the risks to inflation. As a result, the Dollar has tumbled against the majors, touching a fresh record high against the Euro and trading back above the $2.00 barrier versus the Pound.
The Euro rose to a record high of 1.3985 versus the Dollar last night as the diverging interest rates expectations in Europe and the U.S make the Euro a far more attractive commodity for investors with the market looking to test the 1.4000 level over the coming days.
However, with the single currency also heading towards a two-year high against the Pound, ECB policy makers may be getting increasingly concerned that a strong Euro will eventually curb economic growth, such is Europe’s dependence on exports.
In terms of economic data, the Euro failed to make further gains against the Pound yesterday as a report from the ZEW centre of economic research showed that German investor confidence had fallen by more than expected in September. The survey for investor and analyst expectations dropped to the lowest level since December as rising defaults on U.S subprime mortgages pushed up credit costs.
The decision from the Federal Reserve to cut U.S interest rates brought the Pound back above the $2.00 level last night as severe Dollar weakness overshadowed growing concerns about the UK economy.
The furore surrounding the UK’s fifth biggest mortgage lender, Northern Rock, has forced the Bank of England to release emergency funding to commercial banks and financial institutions as the credit slump threatens to curb consumer confidence.
In addition, a report yesterday showed that the annual rate of UK inflation had unexpectedly fallen to the lowest level since March 2006 last month with consumer prices rising just 1.8% from a year earlier compared with 1.9% in July. It is the second month in succession that inflation has remained under the government’s 2.0% target and gives the Bank of England the scope to reduce interest rates in response to a worsening credit market slump.
UK inflation has slowed from a decade-high of 3.1% in March to just 1.8% less than six months later and with signs that the housing market is slowing, the Central Bank may have little choice but to lower the benchmark lending rate over the next quarter.
Therefore, the focus this morning will fall on the minutes from the Bank of England’s last policy-setting meeting where the MPC elected to hold interest rates at 5.25% and a unanimous decision may be negative for the Pound.
The Pound continued to decline for the fourth straight day against the Dollar, dropping through the $2.00 barrier while also falling below 1.4400 versus the Euro as the impact of the credit crunch surrounding Northern Rock and other financial institutions continues to weigh on sentiment.
The overwhelming decline of the Pound looks set to continue this week despite the best efforts of the UK Chancellor, Alistair Darling, who announced yesterday that the government will guarantee all deposits of Northern Rock account holders.
However, his comments did little to ease concerns and the wave of depositors withdrawing savings from UK banks, including Northern Rock, provides an indication that consumer confidence has been hit hard from this financial crisis.
As a result, the Bank of England have little choice but to lean towards monetary easing over the coming months although the latest assurances from the government will probably see interest rates remain on hold until the first quarter of 2008.
In terms of economic data, the focus this morning will fall on the latest round of inflation numbers with consumer prices expected to drive higher over the last month following the significant rise in oil prices and the drop in Sterling. The annual rate of UK inflation fell below the 2.0% threshold in July, dropping 0.6% from the previous month after the Bank of England raised interest rates on five separate occasions over the past year.
The positive sentiment surrounding the Euro continued to gather momentum yesterday as the single currency traded at a near-eighteen month high versus the Pound and also hovered near the record highs against the Dollar.
The German ZEW survey for business confidence is due for release this morning and is expected to show a sharp drop in sentiment as the volatility in credit markets drives borrowing costs higher. The German economy is heavily reliant on export growth, making Germany vulnerable to a global slowdown and although this should be negative for the Euro, the impact should be limited.
The focus today will inevitably fall on the FOMC interest rate announcement this evening and it will be viewed as a crucial event in terms of direction of the Dollar over the coming weeks.
The impact of the U.S subprime mortgage crisis on global financial markets has seen the market anticipate the first adjustment in U.S monetary policy in over a year with the Fed expected to cut interest rates by at least 25 basis points.
However, Fed fund futures are currently pricing in a greater than 50% chance that policy makers will reduce the benchmark lending rate by half a percentage point and anything less than this could prove a disappointing outcome and limit the Dollar’s decline.
The chairman of the Fed Reserve, Ben Bernanke, has the unenviable task of weighing up the risks of a recession against shrinking investor confidence and while a quarter-point reduction may not be enough to bolster growth, a half a point cut may fan inflation.
Following on from last week, the Pound fell to the lowest level in well over a year versus the Euro and has also fallen through the $2.00 barrier against the U.S Dollar after the UK mortgage lender, Northern Rock, received the largest amount of emergency funding in over 30 years.
As a result, the Pound posted its biggest weekly decline in nearly two years against the Euro as the credit crunch surrounding Northern Rock forced the lender to seek emergency cash from the Bank of England in order to ease a “severe liquidity squeeze.”
The subsequent reaction from the general public is likely to cause a significant drop in consumer confidence over the coming months and that may increase speculation that the monetary policy committee may need to cut interest rates early next year.
The focus this week will fall largely on the minutes from the Bank of England’s last policy meeting where the voting pattern of the committee will be revealed in addition to the tone of the discussions. The nine-strong panel are widely expected to have voted unanimously to hold interest rates in September given the problems surrounding financial markets.
Since breaking through the trend support last week, the Pound dropped 2.0% versus the Euro by the close of trading on Friday while the market is now looking particularly “over-sold” and therefore a technical bounce is likely over the coming days.
The Euro has made strong gains against the majors over the past week as the diverging interest expectations between Europe and the U.S sent the pair to a fresh record high on Thursday.
The single currency also rose an incredible 2.0% versus the ailing Pound as a number of hawkish statements from ECB officials increased speculation that the governing council will lift interest rates again this year.
In the short-term the market is now taking an oversold position and we can expect a sharp bounce upwards over the next few days. However, the technical picture still points to further downside movement and any hint of a UK rate cut could send the Pound
under 1.4200 for the first time in over 2-years.
There is a fundamental lack of economic data released this week with the focus falling on the German ZEW expectations balance while the market will also pay particular attention to ECB comments on Friday with a number of members due to speak including the Chairman, Jean-Claude Trichet.
The decline of the Pound has helped the Dollar penetrate the $2.00 level this morning but the U.S currency continues to struggle against the Euro amid speculation that the Federal Reserve will cut U.S interest rates tomorrow night.
Following on from last week, the Dollar was also hampered by reports that retail sales growth rose less than initial forecasts in August with sales rising just 0.3% from July. The report from the Commerce Department will only add to calls for an interest rate cut this week and the Fed are expected to ease rates by 0.25% with the tone of the statement also indicating further cuts in the pipeline.
There is also a plethora of significant economic reports released this week with the focus falling on the latest consumer price data, which is expected to show that the annual rate of inflation has dropped to 2.2% in August.
Just a few weeks ago most economists were expecting the Bank of England to raise borrowing costs to 6% at the September meeting. Stock markets were strong, inflation risks were still deemed to outweigh growth concerns, the housing market was firm and credit was still easily accessible. Unsurprisingly with this backdrop, sterling was enjoying a strong run against most major currencies, hitting 2.06+ against the US dollar, and 1.4950 against the Euro. Fast forward six weeks, and things look very different. It is now widely accepted that interest rates have peaked at 5.75% in the UK, while in Europe further rate increases are still on the cards. British homeowners previously worried about rising mortgage costs will be breathing a sigh of relief, but for anyone looking to buy a home abroad, particularly in Europe, the changing interest rate outlook is already having a serious impact on the cost of their purchase.
Previous expectations of a rate hike to 6% gave sterling a 2% yield advantage over the Euro (which yields 4%), helping the pound tread water through the summer months. The recent financial market turmoil triggered by the US sub prime mortgage crisis sent ripples through the world’s financial markets, prompting central banks to take drastic action by providing cheaper credit to the banking system in order to avert a credit crunch. The Bank of England is the only major central bank not to take action in this way, reluctant to contribute to what it sees as a “moral hazard”. “If you protect someone too well against an unwanted outcome, that person (or bank) may behave even more recklessly”.
Clearly not prepared to bail out the banks, the BoE are not so reticent when it comes to the consumer. The danger posed by a consumer led downturn now outweighs inflationary risks for the first time in nearly two years, making further rate increases very unlikely. The market has been adjusting to the new scenario over the last few days, leading to a steep fall in the sterling/euro rate. Notably, sterling fell below long term trend support last week, leading to warnings of further downside from technical analysts at TorFX, who follow price trends in the hope of predicting future direction. In a special market update on Wednesday morning (12th), clients were alerted to the “precarious” technical outlook. By the end of the day, the pound had lost nearly 2% on week, which translates into an extra £3,500 on the cost of a European property priced at €250,000. Sterling suffered even larger falls against other European currencies this week, down over 3% against the Polish Zloty and Swedish Krona. However, buyers of the Australian and New Zealand currencies have seen exchange rates rocket by over 10% in the last few weeks as investors dumped high yielding currencies which are perceived as risky in the current climate. That is resulting in massive savings for anyone buying property in these territories.
“We are seeing record trading volumes in the Australasian currencies. Clients are increasingly using forward contracts* to lock in favorable exchange rates, taking advantage of the current volatility. Conversely, clients buying in Europe are also booking forward, but for the opposite reason. They see the weakness in the exchange rate, and would rather fix their rate than face further losses.” said Jon Beddell of TorFX.
*( a forward contract allow the buyer to reserve currency at today’s exchange rate for up to one year ahead, with only a small deposit required, removing the risk of exchange rate movements from their transaction)
In his first public comments since the credit crisis emerged, Bank of England governor Mervyn King yesterday recognized the potential impact on the consumer if banks start to pass on the higher borrowing costs they now face in the interbank loans market. The LIBOR rate (the rate at which banks can borrow from one another) has risen sharply above the Bank’s base rate, and in the absence of cheap loans from the BoE, these costs will eventually be paid by the consumer in the form of higher mortgage payments.
Of course, what most foreign property buyers want to know, is where the pound will go next. If history is anything to go by, markets tend to swing far beyond expectations. The pound hit 1.5300 in January, seeming to defy even the most bullish expectations as the Bank of England surprised the market with an unexpected rate hike.
Considering the shaky outlook for stock markets, recent figures showing a sharp decline in inflation, an apparent slowdown in house price growth, and a dip in consumer confidence, the argument for a rate cut cannot be far away. Current market expectations are for a 10% chance of an October rate hike, and 0% chance of a cut. Given how quickly the outlook has changed in the last few weeks, it is entirely likely that by November, the debate for a cut in interest rates will be “in the market”, which could send sterling sharply lower unless the ECB also ease borrowing costs. If the market overshoot mirrors the move we saw in January, that would imply an exchange rate of 1.4250.
The recent negative sentiment surrounding the Pound gathered momentum last night as the UK currency fell to the lowest level in 14-months versus the Euro amid reports that UK lender Northern Rock plc sought emergency funding from the Bank of England.
Britain’s fifth largest mortgage lender requested a short-term credit line with the loan to be made at a “punitive” rate of interest in order to avert a credit crisis as the impact from the U.S subprime mortgage fiasco threatens more and more entities worldwide.
The Bank of England unexpectedly relaxed restrictions on financial institutions and encouraged them to lend each other more in an attempt to reduce the overnight lending rate that is threatening to curb the pace of economic growth. The move comes only 24hrs after the governor of the Bank of England, Mervyn King, refused to relax the tough policy of loaning funds below the base rate because policy makers can’t afford to “encourage excessive risk taking.”
In the aftermath of the report, the Pound declined for a sixth straight day against the Euro and also headed for a weekly loss against 15 out of the 16 most active currencies on speculation that the Central Bank will delay a further rate increase. Sellers of Sterling may will be well placed to take advantage of the current rate of exchange before further downside moves are likely over the coming week.
The Euro smashed through the support level at 1.4555 against the Pound and also rose to a fresh record high versus the Dollar yesterday as the single currency prevailed amid increased speculation that the ECB would continue to tighten interest rates.
The Central Bank elected to hold rates steady this month and altered the tone and language in the accompanying statement to suggest that rates may remain on hold amid the increased turmoil in global financial markets.
However, recent commentary from ECB governing council member, Yves Mersch, helped propel the Euro higher yesterday as he stated that the Central Bank “may resume tightening” depending on the analysis of new economic data.
The hawkish bias is particularly pertinent amid reports that the Federal Reserve are likely to cut interest rates this month while the President, Jean-Claude Trichet, continues to call monetary policy “accommodative.”
The Dollar established a fresh record low against the Euro for the second day in succession as we tentatively approach the 1.4000 level amid reports that the U.S Federal Reserve will have little option but to lower borrowing costs next week.
However, the Dollar has found some support this morning and is currently holding under 1.3900 ahead of U.S data released today that will surely have a bearing on the decision next Tuesday.
Retail sales growth in August is expected to show that spending accelerated last month while consumer confidence was near the lowest level since August 2006 as investors decrease bets that the Fed will lower rates by 50 bias points to 4.75% and cut the U.S yield advantage over Europe.
The Dollar has also made significant gains against the Pound with a host of U.S economic data due for release this afternoon with the U.S current account deficit expected to narrow in the second quarter while industrial production probably increased 0.3% last month.
Daily Foreign Exchange Rate Forecast – The Pound slumped below $1.54 against the U.S Dollar yesterday
by Adam Solomon
Sterling / Euro and US Dollar
The Pound slumped below $1.54 against the U.S Dollar yesterday, while UK government bonds rose, after further losses in global stocks boosted demand for fixed-income and the Dollar as a haven. The Pound stayed lower against the Dollar, as a report from the Bank of England showed that... Read more
Foreign Exchange Daily Forecast – The Pound rallied against the Euro yesterday
by Adam Solomon
Sterling / Euro and US Dollar
The Pound rallied against the Euro yesterday, rising above 1.2150, while the UK currency also made modest gains versus the majority of the 16 most actively traded currencies, with the exception of the U.S Dollar, which is gaining on risk sentiment. Sterling gained for a third straight day... Read more
Canadian Dollar Foreign Exchange Rate Forecast – Canadian second quarter growth figures due out today
by Jon Beddell
Foreign Currency Market Update – GBP / CAD Update
A slight upward revision to the UK’s second quarter GDP figures to 1.2% did little to lift Sterling last week as investors focus on the longer term impact of the government’s austerity measures. On the other side of the Atlantic the US suffered a... Read more
South African Rand Foreign Exchage Forecast – The market enjoys a relatively stable period
by Jon Beddell
Foreign Currency Market Update – GBP / ZAR Update
It’s not surprising to see this market enjoying a relatively stable period. The dominant theme in the markets right now is that there are two major currencies in play. The US dollar…and everything else! As evidence of a new economic slowdown continues... Read more
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