by Adam Solomon
Sterling / Euro and US Dollar
The Pound plunged below $1.50 against the Dollar for the first time in almost 10-months yesterday, as the UK currency was subjected to heavy selling pressure at the start of the European session. Sterling sentiment capitulated as the currency also plunged through 1.10 against the Euro, after the latest polls showed that Britain may be left with a minority government for first time since 1974, hampering efforts to reduce the nation’s debt.
The break below the pivotal $1.50 level against the Dollar led to an acceleration of downward pressure, as the Pound slumped 3% just below $1.48 against the Dollar, before a modest recovery later in the session. There were further concerns over the UK government debt situation and the fears were amplified by an opinion poll from YouGov Plc, which suggested a high risk of a hung parliament.
The Conservatives’ lead over the ruling Labour Party has dwindled in recent weeks and an indecisive outcome to the general election, which is likely to be held in May, would make it more difficult for the budget deficit to be reduced. UK insurance group Prudential confirmed that it was in advanced talks to buy AIG Asian operations for £23.5 billion and this was also a negative factor for Sterling, given expectations of heavy capital outflows.
Greg Anderson, a currency strategist at Societe Generale SA, said that “political uncertainty is an issue for sterling and it will be until after the election. It’s a big country, with big problems and the politics add to them.” The UK currency lost 1.1% against the Euro yesterday, weakening below 1.10 for the first time since December 4th.
UK mortgage approvals dropped in January by more than expected to the lowest level in eight months, adding to recent evidence that the recovery in the housing market may be losing momentum. Lenders granted 48,198 home loans, compared with 58,223 in December, while gross mortgage lending dropped to the lowest level since 2000.
Bank of England policy maker Kate Barker said last week that the property market may face adjustments, as banks curb lending. Hometrack Ltd reported yesterday that price gains last month don’t have solid foundations, while the bad weather and an increase in transaction tax may also hampered dampened activity.
The Pound fell a further 0.7% against the Dollar after the report, a trend that would continue through the majority of the day. Elsewhere, other data published yesterday showed some parts of the economy are expanding, suggesting that the UK faces an uneven recovery. An index of manufacturing held at 56.6 in February, the highest since October 1994.
Simon Derrick, chief currency strategist at Bank of New York Mellon Corp, said that “we have a truly negative sterling story starting to build. A hung parliament is now very much the probability. The likelihood that we’re going to move to a rapid lessening of the deficit is being taken away.” Sterling has plummeted 7.9% against the Dollar and 2% versus the Euro this year and the degree of pessimism aimed at UK assets indicates that the downward move may have only just begun.
The Pound also plummeted against all of the 16 most actively traded currencies yesterday, falling below 1.70 against the Australian Dollar for the first time in over a decade and 1.60 versus the Canadian Dollar. UK stocks rose for a second straight day on speculation that Greece will receive monetary stimulus to finance its debt.
Bank of Tokyo-Mitsubishi UFJ Ltd lowered its forecast for the Pound yesterday, saying its losses may accelerate towards $1.40 against the Dollar, after surveys showed elections this year may produce a minority government. The UK currency depreciated for the fifth consecutive day against the Dollar, pushing its decline this year to 7.4%.
Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd, said “with the balance of risks now shifting in favour of the formation of a minority Labour government following the election, we have become even more bearish on the Pound. We have lowered our Pound-dollar target further, anticipating a fall toward $1.40.”
Data Released 2nd March
EU 10:00 – HICP Flash – (February)
EU 10:00 – Producer Price Index – (January)
CAN 14:00 – BoC Interest Rate Announcement
AUS 03:30 – RBA Interest Rate Announcement
