GBPEUR/GBPUSD
Following on from last week, the Pound advanced to the highest level against the Dollar in more than a month on Tuesday, while 10-year gilts increased by the most since July 23rd. The minutes from the Bank of England’s last policy-setting meeting showed that all nine policy makers voted unanimously to keep the asset-purchase program unchanged.
However, the UK currency remains susceptible to downward pressures and declined against the majors on Thursday, after a report showed that UK retail sales unexpectedly stagnated for a second month in September. While investors scaled expectations that the Bank of England will pause its asset-purchase plan. The report from the Office of National Statistics showed that sales were unchanged from August, a sign that the economy is struggling to emerge from the recession.
Rising unemployment and tighter credit conditions are discouraging consumers’ from spending and reports last week signals that weakness in the economy is persisting at a time when policy makers are considering whether to increase quantitative easing from the current £175 billion. James Shugg, an economist at Westpac Banking Corp, said yesterday that “there will be retrenchment as households pay down debt. The economy still needs quite a lot of support. The BoE will extend the quantitative easing program in November.”
The Pound fell towards $1.6530 against the Dollar after the report, from $1.6630 earlier in the session, as food sales slipped 0.1%, while textile, clothing and shoe sales fell 0.5% on the month. J Sainsbury Plc, the UK’s third biggest supermarket, reported decelerating sales this month and said that revenue growth will become more difficult to achieve.
Rising unemployment is set to further hinder the economic recovery, while the number of people out work in the three months through August rose by the smallest amount in a year, the jobless rate, at 7.9%, is still the highest in more than a decade. The BoE governor Mervyn King and policy maker David Miles have pushed for a bigger expansion of bond purchases in August and still believe that the outlook for consumer prices is volatile.
The Pound dropped by the most in almost two weeks against the Dollar, after the Deputy Governor of the Central Bank Paul Tucker said that expanding so-called quantitative easing is “possible” if necessary. Ian Stannard, a foreign-exchange strategist at BNP Paribas SA, said that “the weaker retail sales reading is weighing on the Pound. There seems to be a desire to extend quantitative easing from certain BoE policy makers.”
The Pound declined heavily against all of the 16 most actively traded currencies on Friday, after a report from the Office of National Statistics unexpectedly showed that UK gross domestic product dropped in the third quarter. Enduring slumps in services, manufacturing and construction has kept the economy entrenched in the worst recession on record.
Gross domestic product dropped 0.4% from the previous quarter, despite widespread forecasts of 0.2% increase. The economy has now contracted in six consecutive quarters, the most since records began in 1955. The Chancellor of the Exchequer Alistair Darling said this week that he will focus on spurring economic growth, as he struggles to cement the recovery in time for the general election in June.
The data released this morning, the first of the third quarter from the Group of Seven nations, suggests that Britain may turn out to be the last major economy to exit the recession. The report will also spark speculation that the Bank of England will expand upon its quantitative easing program in November, a move that would curtail Sterling sentiment.
The Pound has plunged under 1.10 versus the Euro and fell by the most in six months versus the single currency in London. The Pound will probably fall further towards the support at 1.0750 and latterly 1.0680, as the report on third quarter GDP gave the Bank of England more impetus to keep enacting emergency measures to spur growth.
Seven months after policy makers embarked on an unprecedented policy to rescue the economy from the worst recession in a generation, the Office of National Statistics report that their efforts thus far have proved to be unsuccessful. Stephen King, chief global economist at HSBC Holdings Plc, said that “having pumped in so much money and still seeing a decline in GDP is damaging from a perspective of confidence and expectations for recovery. They’ll be thinking very hard about whether to extend quantitative easing. They need to do something to show they care about the economy.”
The UK economy is still mired in the worst recession since the Second World War, even after pledges of about one trillion pounds in stimulus and banking aid from the government and the Bank of England. Mervyn King, whose push to expand bond purchases to £200 billion in August was defeated, may win some support at the next announcement on November 5th.
The prolonged economic slump dashes hopes that the UK is poised to follow the U.S, Germany and France out of recession. In terms of economic data, the focus will fall on a report from the Confederation of British Industry, alongside the Nationwide and Housetrack data on the UK housing market. Consumer confidence is expected to climb, while the banking and house price data will be watched for any improvement.
The Pound will remain vulnerable this week, after the shocking news that the UK economy contracted 0.4% in the third quarter. As speculation builds ahead of the November meeting, investors will be paying close attention to comments from the BoE’s Posen and Bean, who are due to speak this week. The UK currency may extend its decline against the majority of the major currencies and Euro and Dollar buyers would be well placed to work stop orders in the market to protect against a sustained and aggressive downward move.
EUR/USD
The Dollar bounced back from a near 14-month low against the Euro last week, amid speculation that the U.S job market will be slow to recover and China will end fiscal and monetary stimulus, reducing investors appetite for riskier positions. The U.S currency strengthened 0.2% to $1.4989 against the Euro in New York, after breaking through the $1.50 barrier on Wednesday.
The Dollar weakened beyond $1.50 for the first time since August 2008, amid signs that the economic recovery encouraged investors to sell the Dollar in favour of higher-yielding assets. The U.S currency may remain under pressure in the near term, as the Federal Reserve trails other central banks in raising borrowing costs.
According to a gauge of technical analysis, the Euro may strengthen towards $1.5283 against the Dollar over the coming weeks, after briefly surpassing the pivotal $1.50 level. Howard Friend, chief market strategist at MIG Investments, said yesterday that “bulls retain overall control. The key technical factor remains the completed double-bottom base pattern with the $1.4719 December breakpoint.”
The Euro has strengthened 15% against the Dollar over the past six months and the ECB President Jean-Claude Trichet said on Monday that “excessive volatility” in currencies is “bad for economic development”. Risk appetite was also generally weaker in early European trading, which helped underpin the Dollar to some extent.
Yuji Saito, head of the foreign exchange group in Tokyo at Societe Generale SA, said that “European officials are expressing worry that the Euro’s appreciation is making things difficult for their economy. This is causing the Euro to undergo a downward correction.” The Euro was trading at $1.4939 in London, marginally down from the previous trading day. The single currency may extend its decline, as officials become increasingly concerned with the strength of the Euro and the impact on exports.
In terms of economic data, the focus in the U.S this week will undoubtedly fall on Wednesday’s GDP figur
es for the third quarter. The report is expected to show a return to growth for the first time since June 2008, as consensus forecasts show a 3.3% rise in output. In the Euro-zone, the focus will be on the EC Sentiment index for September, which are expected to continue their upward trend.
Data Released 26th October
U.K 00.01 Hometrack House Prices (October)
GER 07:00 Gfk Consumer Confidence (November)
written by Adam Solomon
