GBPEUR/GBPUSD
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.
Data Released 18th May
U.K 00:01 Rightmove House Prices (May)
EU 10:00 Foreign Trade Balance (March)
U.S 18:00 NAHB Housing Index (May)
written by Adam Solomon
