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The Pound declined against the Euro yesterday, ending a two-day advance, while the UK currency also found strong support around $1.5850 versus the U.S Dollar, after outgoing Bank of England policy maker David Blanchflower said that he doubted whether the UK economy would grow this year or next. Blachflower’s pessimistic outlook for the economy has poured scorn on suggestions that we’re through the worst of the recession.
Jeremy Stretch, a senior currency strategist at Rabobank International in London, said that “we’d moved too far forward pricing in a recovery story. We’re having a bit of a reality check.” The Pound also slumped against the majority of the major currencies, after an industry report showed that UK retail sales fell in May, another sign that the recession may not be easing.
A survey of retailers showed a net 17% reported dropping sales this month, compared with just 3% saying that sales rose in April. UK retail sales deteriorated in May and next month will remain “difficult” for stores, as unemployment continues to rise and lending conditions remained constrained. The report from the Confederation of British Industry said that “conditions were tough again in May for retailers, proving April’s better sales figure was a temporary blip.”
The UK government has predicted that the economy will endure its worst recession since the Second World War this year, as companies slashed jobs and cut production. Tesco Plc, the UK’s biggest retailer, had the outlook on its A3 credit rating changed to “negative” from “stable” by Moody’s Investors Service yesterday.
UK consumer spending has declined by the most since 1980 in the first quarter, as the rising jobless rate and escalating housing slump restrains sentiment. The report from the CBI yesterday has signaled that at least the pace of the decline in sales is slowing and companies were also the most positive about the business climate since November 2007.
The Pound weakened to 1.1430 against the Euro yesterday, after a reaching a high of 1.1544 on Wednesday. The benchmark FTSE 100 Index advanced for the first time in three days, despite Blanchflower’s comments that the UK the economy faces “many false downs.” The Pound was little changed against the Dollar, consolidating back towards $1.5947, after rallying to the strongest level since November 5th.
The UK economy is expected to contract 4.1% this year and the International Monetary Fund said on May 20th that the government should reduce borrowing and retrain spending. The Chancellor of the Exchequer Alistair Darling predicted a decline of as much as 3.5% in his annual budget statement on April 22nd.
The Pound also weakened yesterday after the UK business secretary Peter Mandelson said that the protracted bankruptcy of General Motors Corp will lead to substantial job losses at its Vauxhall unit in Britain. The UK currency has advanced 4.4% against the Dollar in the past two weeks and was due a correction, according to the 14-day relative strength index.
The gauge of technical analysis that traders use to predict currency moments was at 73.35 yesterday, from 74,81 the previous day. The Pound will continue to gain protection from a lack of attractive alternatives, especially if there are renewed fears over the Euro-zone bond markets. The UK currency is edging back towards the resistance at $1.6000 against the Dollar this morning, after Nationwide reported a 1.2% increase in house prices for May.
EUR/USD
The Euro failed to break a key resistance level against the Dollar yesterday, despite reports that German unemployment rose by less than expected in May. The number of people out of work increased to a seasonally adjusted 1,000 to 3.46 million, slightly less than initial forecasts. The jobless count was pushed down by as much as 20,000 because of the law that forces the agency to alter the way it counts the nation’s unemployed.
The unemployment rate in Europe’s largest economy may shrink 6% this year, as the government spends roughly €82 billion to fight the impact of the global credit crisis. Elsewhere, the Euro-zone business and consumer confidence data was slightly weaker-than-anticipated, which dampened the mood of optimism following the labour market numbers.
European confidence in the economic outlook rose to a six-month high, adding to signs that record low interest rates and government spending plans are beginning to pull the economy out of the worst recession since the Second World War. An index of business and consumer sentiment in the 16 nations sharing Euro increased to a reading of 69.3, from 67.2 in April.
Although the overall result of the data was slightly weaker than expected, the May reading was the highest since November, while consumers’ price expectations, which turned negative for the first time on record last month, fell to the lowest level since at least 1990. There is mounting evidence that the worst of the financial crisis may be over, as manufacturing and service industry improve and global stock stand close to the highest level in six months.
Elsewhere, retail sales declined at a faster pace in May as rising unemployment prompted consumers to hold back spending. The Euro was higher against the Dollar after the confidence report and the U.S currency came under further selling pressure, after U.S jobless claims declined to 623,000 last week. In addition, the new home sales data was slightly weaker than predicted with sales almost unchanged at an annual rate of 352,000 for April.
The Pound briefly traded above 1.6000 versus the U.S Dollar for the first time in nearly seven months, while the UK currency also rallied to a high of 1.1544 against the Euro, amid increased optimism that the worst of the recession is over, stoking demand for British denominated assets. Sterling extended its rally throughout the course of the day, from a 23-year low reached in January, to 19% as the FTSE 350 Banks Index moved higher.
The UK currency appreciated as much as 1%, to a high of $1.6078 versus the Dollar, the highest level since November 5th, while the Pound climbed 1.4% versus the Euro. Brian Kim, a currency strategist at UBS AG said that “the pound is having a correction after being hammered hard last year. There’s some valuation argument.”
The 19% drop in the Pound’s value against the Dollar over the past year has made the UK currency more attractive to investors, who think that additional government stimulus packages will drag the economy out of its current slump. Almost a quarter of the 220 fund managers surveyed by Bank of America in May said that the Pound is undervalued at its current level.
From a technical perspective, the Pound climbed almost 2% since it broke through its 200-day moving average versus the Dollar on May 20th, a sign that investors who use charts to plot currency moves that sterling will extend its advance. David Powell, a currency strategist at Bank of America, said that “the view that sterling is gaining ground is becoming more prevalent.”
The Pound has also gained 3.3% in value against the Euro in May and according to economists at Bank of America, the UK currency may appreciate to 1.1764 against the Euro by year-end, as we tentatively approach the yearly high of 1.1574. The Pound may also rise against the Euro because its decline during the financial crisis wasn’t justified, when considering the difference in interest rates.
Elsewhere, the Pound stood firm yesterday despite reports from the Nationwide Building Society, which said that UK house prices may keep falling for the rest of the year, as unemployment continues to rise higher. The UK economy will remain entrenched in a recession for the remainder of 2009, while the recovery next year is expected to be ’slow’ and ‘protracted’.
The rising jobless rate is a major concern for the government and unemployment may continue to rise next year because the labour market will lag behind any developments in the broader economy. Building societies, which account for about 18% of the UK mortgage market, are facing rising defaults, as the country struggles with its worst recession since the Second World War.
Moody’s Investors Service cut its rating on eight customer-owned lenders, including Nationwide, in April on expectations of increased credit losses. UK house prices are forecast to fall 14% this year, denting hopes that we’re through the worst of the recession. However, price declines have slowed in recent months, though it’s too early to say whether we have reached a turning point.
UK banks have granted more mortgages in April than the previous month, a sign that the property market may be stabilising. The UK mortgage market contracted last year and will probably shrink again this year, as net lending fell to £2.1 billion, from £8.9 billion a year earlier. In terms of economic data, the focus this morning will fall on a report from the Confederation in British Industry but the Pound may continue to make gains, providing global risk appetite improves.
EUR/USD
The Dollar gained for a second consecutive day versus the Euro, after the Treasury’s record-equalling $40 billion sale of two-year notes yesterday drew the most demand since November 2006, from a group of investors that includes foreign central banks. The U.S government auctioned $35 billion in new five-year securities yesterday.
The U.S currency weakened back above $1.4000 versus the Euro first the first since January, amid concerns that the U.S credit rating deteriorated as the budget deficit swelled. The government’s credit rating currently has a stable outlook and demonstrates the attributes of a AAA sovereign. The headline U.S economic data was close to expectations, as existing home sales rose to an annual rate of 4.68 million in April.
Although there is evidence of a revival in interest for foreclosure related properties as prices decline, the rise in inventories will dampen expectations of more than just a limited recovery in the housing sector. The focus today will fall on U.S durable goods orders and new home sales, both of which are expected to show some modest improvements on the month and that may hurt the Dollar, diminished its appeal as a haven.
The Pound rallied strongly against the Euro yesterday, rising towards 1.1400 by the close of trading last night, while the UK currency also tested resistance at $1.6000 versus the Dollar, amid speculation that Britain’s financial institutions may weather the financial crisis better than their counterparts in Europe. Sterling moves were again influence by degrees of risk appetite and the UK currency gained ground in the day, as international equity markets rallied strongly.
Bank of England MPC member Timothy Besley stated that the government’s budget position would have been tackled in the medium term, while there was also some short-term room for maneuver. Underlying fears over the debt burden will still be a significant factor for the Pound and concerns would return quickly on a run of disappointing data.
The Chancellor of the Exchequer Alistair Darling said last month that the budget deficit this year will reach £175 billion, or 12.4% of gross domestic product, the highest proportion amongst the Group of 20 nations. The Treasury plans to auction a record £22 billion of gilts this fiscal year, 50% more than in 2008, in a last ditch attempt to drag the economy out of the worst recession since the Second World War.
The Pound rebounded from three consecutive days of losses, after reports in the Daily Telegraph cited a comment from Jochen Sanio, president of the banking regulator BaFin, who said that debt levels at German banks will blow up “like a grenade”. He went on to say that the problem will persist unless the coalition government plan to strengthen the financial sector.
The Euro also resumed the downward momentum against the resurgent Pound, after Euro-zone industrial orders fell in March for the eighth straight month. Michael Klawitter, a currency strategist in Frankfurt, said that “the amount of bad news that’s priced into the Pound quite considerably exceeds that priced into the Euro. Sterling is also being buoyed on concerns there will be further bad news about German banks.”
According to the report from the European Union’s statistic office, industrial orders in the 16 nations sharing the Euro fell an annual 26.9%, after a revised 34.2% drop in February. Economists had predicted a more modest decline, as orders slipped 0.8% on the month. Orders declined for an eighth straight month in March, as the worst recession in sixty years curtailed global demand for machines and equipment.
The European economy has contracted at the fastest pace in at least 13-years in the first quarter of this year, as companies scale back production and cut their workforce. However, the slowing pace of the decline in industrial orders adds to speculation that the recession may be relenting. The European Union has cut its outlook for the Euro-zone economy to forecast a 2009 contraction twice as deep as it predicted just three months ago.
The Pound maintained a firm tone this morning, as global risk appetite improves, despite reports from the Nationwide Building Society that showed full-year earnings fell 69%, following the rise in impairment charges and low interest rates. Euro and Dollar buyers can currently take advantage of the best exchange rates so far this year. It would be prudent to use a stop order around 1.1300 against the Euro and 1.5800 versus the Dollar to protect against an adverse decline in stock market sentiment.
EUR/USD
The Euro declined against the Dollar yesterday following concerns over the German banking sector and speculation that last week’s substantial gains were too large to sustain. The single currency depreciated for the first time in seven days, eroding gains that pushed the Euro to the highest level against the Dollar in four months.
The cautious tone extended into the U.S trading session, as the Euro dipped to lows near the significant support levels near $1.3860 versus the Dollar. Andrew Chaveriat, a technical analyst at BNP Paribas SA in New York, said that “Euro bulls are running out of buying power, a close below $1.3880 will signal further declines in the common currency.”
In addition, a report from UBS AG showed that the Euro is unlikely to extend its gains against the Dollar without a revival in global demand. “the European Union and the ECB desperately need global demand to rebound soon, even as the domestic economy is getting less help from fiscal and monetary stimulus than most other economies, to take pressure off the economy and the currency.”
The Dollar and the Japanese Yen declined against the majority of the 16-most actively traded currencies, after a government report showed that U.S consumer confidence rose to the highest level since September, reducing demand for the security of Dollar denominated assets. The Conference Board’s index of U.S consumer sentiment surged higher in May to record the biggest gains since April 2003.
The U.S currency posted its biggest weekly decline against the Euro in two months last week, amid speculation that a deterioration of U.S creditworthiness will make assets such as treasuries less attractive to investors. Nevertheless, the positive tone of the consumer confidence data increased optimism that the economy would recover later this year, and stocks subsequently advanced for the first time in five days.
The Standard & Poor’s 500 index increased 2.1%, amid speculation that the revival in the economy may encourage consumer spending, which accounts for roughly 70% of gross domestic product. However, rising unemployment and falling property values undermine that optimism and it will take time to establish a sustained rebound.
The sharp rise in global confidence is an important factor in boosting risk appetite, which saw the Dollar decline sharply towards $1.4000 against the Euro. The ongoing situation with General Motors Corp will be watched closely this week, amid strong expectations that the company is poised to file for bankruptcy. There will be some hopes than an easing of uncertainty will help boost sentiment and could weaken the Dollar further on improved risk appetite.
Following on from last week, the Pound declined against the majors on Thursday, dropping towards the support at 1.1270 against the Euro and $1.5500 versus the Dollar, after Britain’s top level credit rating said that it is more likely to be cut by Standard & Poor’s, as the government’s finances deteriorate, following the worst recession since the Second World War.
The U.K’s AAA outlook was lowered to “negative” from “stable” because of the nation’s increased budget deficit. The government’s budget deficit this year will reach £175 billion, or 12.4% of gross domestic product. A downgrade in the credit rating would make Britain at least the fifth European nation to be cut this year because of the ongoing economic slump.
S&P; lowered the outlook for the UK’s credit rating to negative, while Moody’s Investors Service said in a statement yesterday that the UK’s top Aaa sovereign credit rating remains unchanged with a “stable” outlook because the government can absorb and reverse the debt burden. The government has given the Bank of England the authority to purchase up to £150 billion of assets with newly printed money, in an attempt to lower borrowing costs.
The government’s efforts to shore up the nation’s finances are being undermined by an economy entrenched in the worst recession since 1991. Unemployment surged higher to 2.2 million in March, the highest level since 1996, while tax income dropped 10% over the past year. The International Monetary Fund expects UK gross domestic product to contract 4.1% this year, the most since the Second World War.
The Pound dropped from the highest level in six months against the U.S Dollar, but recaptured most of the early losses throughout the course of the day, amid speculation that a downgrade wasn’t imminent as two other rating companies affirmed that the UK’s outlook is “stable”. The UK currency touched a high of $1.5946 over the weekend, close to the highest level since November 10th, before closing back towards $1.5850 following the market holiday.
The Pound has gained 5.7% in value against the Dollar this month alone, and a further 1.8% versus the Euro, as UK retail sales increased and the housing market showed tentitative signs of recovery, as the worst of the recession appears to be over. A report from the Nationwide Building Society showed that house prices fell less-than-expected in April, after posting a surprise increase in March. Consumer confidence also climbed to the highest level in a year.
UK stocks fell the most in a month following the announcement from Standard & Poor’s Rating Services, while the former Federal Reserve Chairman Alan Greenspan signaled that the financial crisis is not over yet. HSBC Holdings Plc and the Royal Bank of Scotland Group Plc declined more than 3%, while the FTSE 100 Index retreated 2.8% on the session, making the measure the worst performing this year among the 23 developed markets.
Concerns over a medium-term downgrade in the UK credit rating will remain an important negative factor for Sterling. The underlying budget data also remained very weak with a £8.5 billion borrowing requirement for April, following a £18.2 billion shortfall previously and there will be significant medium-term currency risks from the debt situation.
The Pound tumbled against the majors yesterday, amid growing concerns over the security of UK denominated assets. Investors were encouraged to sell the Pound, amid speculation that the nation’s credit rating will be cut further, following last week’s announcement by Standard & Poor’s. In addition, the Treasury plans to auction a record amount of gilts in this fiscal year, 50% more than in 2008.
The UK currency lost ground against the majority of the 16-most actively traded currencies, falling 0.4% against the Euro, after reports on Friday showed that UK gross domestic product in the first quarter dropped 1.9%. The result matched initial estimates, while consumer spending fell 1.2% and investment declined 3.8%.
UK consumer spending slumped by the most since 1980, while companies drained inventories at a record pace in the first quarter. The figures highlight the challenge facing the government, after the BoE governor Mervyn King said that the recovery in the economy will be “slow” and “protracted”. Willem Buiter, a former BoE policy maker, said that “hopefully the first quarter was the biggest rate contraction. But the economy will be shrinking into next year, we’ll be in a recession and have sharply rising unemployment for the next year or year and half”.
Outgoing Bank of England policy maker David Blanchflower said that the UK economy may be about “three quarters” through the recession. The Deputy Governor Charles Bean said that the “bottom in activity may not be far off” and the pace of economic contraction should ease. Yilin Nie, a currency strategist at Morgan Stanley, confirmed that although UK economic data, “as highlighted by the recent rating outlook downgrade, we think much of the bad news is in the Pound price.”
Following the Bank Holiday, the focus this week will fall on consumer data, with just the CBI distributive trades surveys and consumer confidence data due for release, alongside the latest Nationwide house price report for May. The Pound finished the week in a strong position against the Euro and the Dollar, a trend that is likely to continue in the short-term, amid a general pick-up in market sentiment.
EUR/USD
The Euro fell for the fist time in seven days against the Dollar yesterday, after a report in the Daily Telegraph cited a German banking regulator saying that debt at the nation’s biggest lenders may increase. The subsequent deterioration in risk appetite saw stock decline, as traders flocked the security of lower yielding assets, such as the Japanese Yen and U.S Dollar.
In addition, the Yen actually advanced against all of the 16-most actively traded currencies, following reports that North Korea test-fired two short-range missiles, a day after conducting an undergorund nuclear test. The Euro declined to a low of $1.3947 against the Dollar, from $1.4017 in New York, after climbing to a high of $1.4051, the highest level since January 2nd.
The single currency also came under pressure, after Moody’s Investors Service placed its rating outlooks for Bulgaria’s DSK Bank AD and First Investment Bank Ltd on review for possible downgrade. The credit rating issure is likely to dominate market sentiment over the coming weeks and any Dollar gains may be temporary, amid speculation that bond sales this week will renew concerns that a record supply of Treasuries will jeopardise the U.S’s AAA credit rating.
The Pound initially declined against the majors yesterday, dropping towards the support at 1.1270 against the Euro and $1.5500 versus the Dollar, after Britain’s top level credit rating said that it is more likely to be cut by Standard & Poor’s, as the government’s finances deteriorate, following the worst recession since the Second World War.
The U.K’s AAA outlook was lowered to “negative” from “stable” because of the nation’s increased budget deficit. The government’s budget deficit this year will reach £175 billion, or 12.4% of gross domestic product. A downgrade in the credit rating would make Britain at least the fifth European nation to be cut this year because of the ongoing economic slump.
The UK will sell a record £220 billion of bonds in the fiscal year through March 2010, as the recession cuts revenue and forces the government to increase spending. The UK economy has contracted 1.9% in the first quarter, the biggest since 1979, when Margaret Thatcher became Prime Minister.
A statement from S&P; analysts said “we have revised the outlook for the UK to negative due to our view that, even assuming additional fiscal tightening, the net general government debt burden could approach 100% of gross domestic product and remain near that level in the medium term.”
The Pound dropped from the highest level in six months against the U.S Dollar, but recaptured most of the early losses throughout the course of the day, amid speculation that a downgrade wasn’t imminent as two other rating companies affirmed that the UK’s outlook is “stable”. The UK currency touched a high of $1.5815, the highest level since November 10th, before closing 0.2% lower at $1.5722 last night.
S&P; lowered the outlook for the UK’s credit rating to negative, while Moody’s Investors Service said in a statement yesterday that the UK’s top Aaa sovereign credit rating remains unchanged with a “stable” outlook because the government can absorb and reverse the debt burden. The government has given the Bank of England the authority to purchase up to £150 billion of assets with newly printed money, in an attempt to lower borrowing costs.
The government’s efforts to shore up the nation’s finances are being undermined by an economy entrenched in the worst recession since 1991. Unemployment surged higher to 2.2 million in March, the highest level since 1996, while tax income dropped 10% over the past year. The International Monetary Fund expects UK gross domestic product to contract 4.1% this year, the most since the Second World War.
The Pound has gained 5.7% in value against the Dollar this month alone, and a further 1.8% versus the Euro, as UK retail sales increased and the housing market showed tentitative signs of recovery, as the worst of the recession appears to be over. A report from the Nationwide Building Society showed that house prices fell less-than-expected in April, after posting a surprise increase in March. Consumer confidence also climbed to the highest level in a year.
The subsequent impact on stocks saw the FTSE 100 Index fall and the Pound declined heavily against all of the 16-most actively traded currencies, as risk appetite deteriorates. The UK currency may extend its losses in the near-term, and Euro and Dollar buyers would be well placed to work a stop order to protect against a sustained downward move.
UK stocks fell the most in a month following the announcement from Standard & Poor’s Rating Services, while the former Federal Reserve Chairman Alan Greenspan signaled that the financial crisis is not over yet. HSBC Holdings Plc and the Royal Bank of Scotland Group Plc declined more than 3%, while the FTSE 100 Index retreated 2.8% on the session, making the measure the worst performing this year among the 23 developed markets.
Concerns over a medium-term downgrade in the UK credit rating will remain an important negative factor for Sterling. The underlying budget data also remained very weak with a £8.5 billion borrowing requirement for April, following a £18.2 billion shortfall previously and there will be significant medium-term currency risks from the debt situation. The Pound has weakened against the Euro this morning, finding support around the 1.1270 level but the UK currency has maintained a strong above against the U.S Dollar.
EUR/USD
The Euro rallied strongly against the U.S Dollar yesterday, rising to the highest level in four-months, after European manufacturing and service industries contracted at the slowest pace in eight months. A composite index for both industries rose to a reading of 43.9, from 41.1 in April, adding to evidence that the Euro-zone recession is easing.
The economy is showing positive signs that it may recover later this year, as numerous stimulus aid and interest rate cuts prop up global demand. German investor confidence rose to the highest level in three years in May, while European exports climbed for a second consecutive month. Nevertheless, policy makers are warning against excessive optimism.
Bundesbank President Axel Weber said last week that it is “not advisable” to assume that a recovery is “safely on track”. Federal Reserve policy makers said last month that the global financial system is still “vulnerable to further shocks”, according to the minutes from the FOMC policy meeting. European stocks dropped for the first time in six days yesterday, as the Fed projected a deeper recession in the U.S economy.
The Dollar slid to a four-month low against the Euro and dropped to the lowest level this year against Sterling, amid speculation that the U.S may lose it AAA credit rating. The U.S currency declined to a low of $1.3971 against the Euro, after Treasury yields rose the most in two weeks yesterday, amid concerns that the government will not be able to fund its fiscal spending.
In terms of economic data, the Philadelphia Fed index improved to -22.6 in May, from -24.4 the previous month. Initial jobless claims fell to 631,000 in the week ending 16th May, from 643,000 previously, while claims for unemployment benefits increased to a fresh record high at 6.66 million.
The Pound rallied to the highest level this year against the Dollar, as oil prices surged above $60 a barrel and stock market gains persisted on speculation that the worst of the recession may be over. The UK currency also challenged resistance levels above 1.1400 against the Euro, after the minutes from the Bank of England’s last policy meeting recorded a 9.0 vote to keep rate on hold.
Policy makers were unanimous in their desire to keep borrowing costs unchanged at a record low of 0.5% and to increase the quantitiatve easing programme by a further £50 billion. There was some debate as to whether there should be an even more aggressive programme of bond buying and this likely to be slightly negative for Sterling.
The Pound extended gains against the Dollar yesterday, after breaking through its 200-day moving average, triggering a cluster of orders to sell the Dollar against the Pound. The UK currency broke through key resistance levels overnight and rallied to a fresh yearly high of $1.5813. The underlying positive sentiment for the Pound continued, after an industry report showed that UK manufacturers were the least pessimistic on the outlook for production in eight months in May.
The report from the Confederation of British Industry recorded further very weak levels for the orders component but the output reading was more positive and maintained hopes that the sector is stabilising. The improvement is risk sentiment has seen the Pound rally above key technical levels against the both the Euro and the Dollar. The upside momentum may continue after the MSCI World Index of stocks rose to the highest level in over six months, amid reports that Bank of America Corp raised about $13.5 billion in a stock sale.
Daragh Maher, deputy head of global foreign exchange strategy at Clayon, said that “sterling is benefiting from the return of risk appetite which has seen stocks outperform. A lot of bad news has already been priced into the Pound, making it one of the most undervalued currencies.”. The UK currency advanced almost 2% against the Dollar yesterday, rising to it strongest level since December 17th.
Euro and Dollar buyers can currently benefit from the best currency rate for 2009, but should consider implmenting a stop order in the market to protect against a retracement following an aggressive upside move. A stop order could be utilised around the support at 1.1270 against the Euro and $1.5554 versus the U.S Dollar.
According to a number of key technical indicators, the Euro’s decline against the Pound is likely to persist. Parabolic Systems, which traders use to track the strength of the trend, switched to selling euros against sterling two days ago. The Commodity Channel Index, a gauge of price direction, also indicated that the Euro has been in an oversold position since May 18th.
The risk to the Pound’s upside momentum centres around the Bank of England and the possibility that it may be more aggressive with asset purchases, increasing them beyond the current authorisation of £150 billion. The minutes from the last policy setting meeting showed that policy makers discussed the prosepect of increasing the asset insurance program “should economic conditions require it.”
The Dollar slumped to close to the lowest level in eight weeks against the Japanese Yen yesterday, while the U.S currency also declined sharply against the Euro, amid speculation that the Federal Reserve will increase quantitative easing measures to boost purchases of assets and unlock credit conditions.
The Pound rallied to the highest level this year against the U.S Dollar, rising to a high of $1.5500 in New York, while the UK currency also strengthened for a third straight day against the Euro, after ICAP Plc posted increased revenue. Marks & Spencer Group Plc’s net income beat analyst’s initial estimates, increasing optimism that the worst of the recession may be over.
UK stocks rose to the highest level in four years, amid speculation that the government has begun talks with investors over the possibility of selling stakes in part-nationalised banks, while mining companies climbed with metal prices. Royal Bank of Scotland Group Plc, majority owned by the government, rallied 4.4% in London, as the FTSE 100 Index gained another 0.8%, rising to the highest level since January 8th.
The FTSE 100 has rebounded 28% from its lowest point of the year on March 3rd on increased optimism that the worst of the recession may be over. European stocks also rallied yesterday, after reports in Germany showed that investor confidence rose to a three-year high in May. The Financial Times reported yesterday that the UK government has begun talks with sovereign wealth funds and other investors about selling stakes in part nationalised banks.
The move is designed to improve confidence in financial stocks and the FTSE 350 Banks Index was up 3.3% on the day, while gilts fell after the Treasury sold £1.25 billion of the bonds. It will auction a record £5 billion of five-year notes in two days, as part of its quantitative easing program. Jeremy Stretch, a senior currency strategist at Rabobank International said that “news from the corporate front is pretty encouraging and that’s supporting the Pound.”
The Pound advanced as much as 1.1% to a high of $1.5514, the strongest level since December 18th last year, while the UK currency also rallied 0.5% to a high of 1.14000 versus the Euro, the highest level since May 7th. ICAP, the world’s biggest broker of transactions between banks, said that profit rose 4% to £175 million in the year to March 31st, while Marks & Spencer reported net income of £508 million.
In terms of economic data, the Pound also stood firm following reports that UK inflation slowed more than expected in April, to the weakest level in 15-months, as the recession undermined price pressure within the economy. According to the report from the Office of National Statistics, consumer prices rose 2.3% from a year earlier, marginally lower than the 2.4% anticipated.
A separate gauge of the report showed that the retail price index measure of inflation dropped an annual 1.2%, the most since records began in 1948. The results of the data will stoke concerns that the economy is slipping further into deflation and tempt the Bank of England to raise interest rates sooner than predicted.
The governor of the BoE Mervyn King said last week that inflation will slow “sharply”, reaching around 0.5% by September. Philip Shaw, chief economist at Investec Securities in London, said “if the recovery doesn’t ignite properly, that risks a very low inflationary environment, possibly deflation.” The drop in the inflation rate was led by the slump in housing costs, as energy prices fell.
The drop in the retail price index, used as a measure of the cost of living, was spurred by lower mortgage interest payments, after the Bank of England cut its benchmark interest rate to a record low of 0.5% and embarked on a period of quantitative easing. Excluding the cost of home loans, retail price inflation was 1.7%, the weakest pace since June 2002.
Policy makers within the monetary policy committee kept the benchmark lending rate unchanged in May and increased the asset insurance program to £125 billion, through the purchase of government and corporate bonds with newly created money. The UK economy is still submerged in the worst recession since the Second World War, after gross domestic product contracted 1.9% in the first quarter.
The Euro declined heavily against the Pound yesterday but the single currency may gain some support this morning, amid fundamental and technical factors. The minutes from the Bank of England’s last policy meeting may undermine support for the Pound, if the monetary policy committee reiterate the increase in quantitative easing measures.
In addition, a report from Societe Generale SA shows that the Euro must trade above the resistance level at 1.1410 against the Pound, created by the May 7th low, if it’s to decline as far the February low of 1.1574, a level that represents a 50% retracement of the downside move. Euro buyers would be well placed to take advantage of the current rate, or at least place a stop order around 1.1270 to protect against a rejection of the upper levels.
EUR/USD
The Euro rallied towards $1.3700 against the Dollar yesterday, after German investor confidence rose more than anticipated, to a three-year high in May. Stock markets subsequently rose and data signaled that the worst of the recession may be over. The report from the ZEW Centre for Economic and Social Research stated that its index of investor and analyst expectation increased to a reading of 31.1, from just 13 in April.
European stocks have gained impressively for the past two months, amid expectations that the government and ECB efforts to revive growth will drag the economy out of the current slump. The German economy has contracted at a record pace in the first quarter of the year but manufacturing orders and exports unexpectedly rose in May and business confidence bounced from a 26-year low.
The German Chancellor Angela Merkel will spend in the region of €82 billion to stem the worst recession in over sixty years. The European Central Bank has trimmed its key interest rate to a record low of 1% and announced that it will purchase €60 billion of covered bonds to help free up credit conditions.
The Dollar declined against all of the 16-most actively traded currencies yesterday, after three U.S financial firms’ efforts to return government bailout money increased speculation that banks have sufficient funds, reducing the demand for the security of U.S denominated assets. The U.S currency fell 0.5% to a low of $1.3636 against the Euro.
In terms of economic data, U.S housing starts unexpectedly fell 13% to an annual rate of 458,000, as builders began working on the fewest number of homes on record in April. The slump in home building has brought the supply of new properties below the rate households are being created, while surging unemployment will temper the likely rebound.
The Pound rallied strongly against the Euro yesterday, rising 1.2% in London, while the UK currency also breached resistance around $1.5350 against the U.S Dollar, after an industry report showed that UK home sellers raised asking prices in May by the most in over a year. According to the report from Rightmove Plc buyers’ access to mortgages improved, as banks freed up credit, and the number of properties saturating the market fell.
The average cost of a home in the UK rallied 2.4% from April to £227,441, recording the largest increase since February 2008. Miles Shipside, commercial director of Rightmove, said in an interview yesterday that “a drastic lack of supply is putting upward pressure on prices. There is increased demand among buyers and slightly more mortgage money becoming available.”
The Bank of England have cut interest rate to an historic low of 0.5% and embarked on a period of quantitative easing to get banks lending again. The Central Bank said last week that there have been sigs of ‘modest improvement’ in housing activity, after the number of mortgages approved by banks rose to the highest level in 10-months.
The former Chancellor of the Exchequer Norman Lamont said yesterday that rising home values will be a key element of Britain’s return to economic growth. However, signs of a recovery in the UK property market have been mixed, after prices fell an annual 17.6% in March, according to reports from Lloyds Banking Group Plc. The slump will leave a total of 1.8 million households, or 15% of those with mortgages, in negative equity by the end of 2010.
A separate report from the Royal Institution of Chartered Surveyors showed last week that enquiries from new buyers rose to the highest level since 1999. Bank’s are loosening credit availability, as loans granted for home purchases climbed to 39,230 in March, compared to 37,716 in February.
The Pound climbed for a third straight day against the majority of the 16-most actively traded currencies, as signs that the worst of the recession may be over sent the FTSE 100 Index 2.3% higher. UK stocks gained by the most in over two week, while gilts advanced, as the Bank of England bought government bonds maturing in 10 to 25 years, as part of its program to lower borrowing costs.
The increase in risk appetite saw the Pound rally significantly against the Dollar, after the benchmark FTSE 100 Index soared towards the biggest increase since April 29th, led by a rally in financial shares. Lloyds Banking Group Plc surged 9.9%, after confirming investors will be offered £4 billion of stock this week.
Gareth Berry, an analyst a UBS AG in London, said yesterday that “we see further gains ahead for sterling, especially against the Euro. Investors have focused on the signs of stabilisation emerging from the UK economy”. The Pound’s 20% depreciation over the past year has made Britain the first choice when Schroders Plc started buying real estate in Europe last month.
The UK consumer prices data will be watched closely this morning for further evidence on economic direction and the recent inflation data releases have also tended to be erratic, which could trigger additional Sterling volatility. The overall impact may be limited as the Pound will continue to be influenced strongly by trend in risk appetite.
EUR/USD
The Euro held firm around the significant support level at $1.3420 against the Dollar on Monday and this helped provide a firmer tone for the single currency during the day, as selling pressure eased. European stock markets were generally resilient and the European trade data reported a headline surplus for the first time in close to a year.
The Euro also found support against the Dollar, after ECB governing council member Axel Weber signaled a reluctance to cut interest rates to below 1% and said that any further recovery in the German ZEW Index would help underpin the Euro today. There was no U.S economic data releases yesterday and the improvement in risk appetite saw the Dollar lose momentum during the day.
Following on from last week, the Pound rallied back above 1.1200 against the Euro, while the UK currency declined against the Dollar, after U.S stocks fell by the most since March. The Standard & Poor’s 500 Index reached the priciest level relative to earnings in seven months.
Ford Motor Co and U.S Bancorp declined at least 12% on concerns they are diluting per share earnings by raising money. In addition, General Motors Corp said that bankruptcy is probable, as the share price tumbled 32% in New York. The S&P; 500 decreased 5%, while the Dow Jones Industrial Average lost 3.6%, spurring demand for safe havens.
UK stocks also fell, extending the FTSE 100 Index’s first weekly loss in over a month, as oil companies followed crude prices lower and investors speculated that the two-month rally may not be supported by the outlook for the economy. The benchmark FTSE 100 dropped 0.3% on Friday, bringing the total loss for the week to 2.6%.
Stocks have rebounded 23% from its lowest point this year but posted its first weekly decline in five weeks but investors have been urged to reduce their holdings of stocks, after UBS AG said hopes of a recovery in the global economy are likely to fade.
A statement from UBS AG chief economist Larry Hatheway said “global economic conditions and earnings power are fragile and investor confidence fickle. Confidence in the ‘green shoots’ of recovery is now challenged by signs of weakness in U.S consumer spending.”
Separately, a report from the Council of Mortgage Lenders said UK repossessions by lenders jumped 51% in the first quarter of the year, as the recession intensified. repossessions rose to 12,800, compared with 8,500 in the same quarter in 2008. The reading is up from 10,400 in the previous three months.
The Bank of England said this week that the UK economy may contract for the rest of the year and lending will take longer to resume that previously forecast. The Bank left the benchmark lending rate on hold at 0.5% last week, as unemployment jumped in the first quarter by the most since 1981. The increase in repossessions is still less than predicted and the group may revise its forecast for a total of 75,000 this year.
The Bank of England’s pessimistic forecasts for the economy may indicate that the governor Mervyn King could need to print more money than the £150 billion currently allocated by the Chancellor of the Exchequer Alistair Darling. The Central Bank may need to ask the Treasury to expand its asset insurance program, after predicting that inflation will stay below target.
The Pound declined last week, amid reports that policy makers increased their asset purchases with newly created money by £50 billion, bringing the total £25 billion short of the maximum allowed. Any moves to extend the program further would tend to undermine Sterling sentiment.
The aggressive swings in risk sentiment will continue to drive the Pound against the Dollar, while the focus this week will fall on the release of the minutes from the Bank of England’s last policy-setting meeting. The Pound declined following the dismal tone of the bank’s quarterly inflation report and the minutes will be closely watched for any fresh developments in the economy.
Elsewhere, Tuesday’s CPI data for April should confirm a downward trend in consumer prices with the headline inflation rate expected to fall back to 2.4% from 2.9% the previous month. The retail price index is also expected to sink deeper into negative territory.
The Pound may find some support as a report from the Official of National Statistics is expected to confirm that official retail sales, which have been showing some signs of recovery, rose again in April. However, the first quarter estimates of UK gross domestic product will probably show that the economy slipped deeper into a recession.
EURUSD
The Euro declined against the Dollar and extended a weekly loss against all of the lower-yielding currencies, after reports showed that the European economy contracted by the most in at least 13-years, raising concerns that the pace of the recovery will be slow. Gross domestic product fell 2.5% from the fourth quarter, as companies cut production and slashed jobs following the worst global slump since the Great Depression.
The degree of the economic slowdown is curbing demand for European exports and eroding consumer sentiment, forcing companies to cut spending and jobs. The German and Italian economies have contracted by the most on record and Kenneth Wattret, chief euro-region economist at BNP Paribas, said that “the recession is an exceptionally deep one.”
From a year earlier, the Euro-zone economy has contracted by 4.6%, the steepest decline on record, as the slump in western Europe is damaging eastern economies by cutting demand for their exports and crippling foreign investment in the former communist states. The European Central Bank lowered interest rates again on May 7th, to lowest level on record at 1%. Policy makers also pledged to buy €60 billion of covered bonds and securities back by mortgages and public sector loans.
The Dollar made further ground against the Euro on Friday, despite U.S economic data suggesting that the economy was stabilising. Industrial production fell 0.5% in April, following a revised 1.7% decline the previous month, suggesting that the pace of deterioration was slowing. Elsewhere, the New York PMI index also rose to the strongest reading since August 2008, as did the Michigan consumer confidence survey.
There is a relatively quiet schedule in the U.S this week, with just housing starts for April and the Philly Fed Index of any real significance. Therefore, the focus will once again return to stock market sentiment and the Dollar will come under further selling pressure if equity markets improve, following last week’s decline.
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