Foreign Exchange Insight - The Pound declines further after manufacturing unexpectedly contracts
by Adam Solomon
Sterling / Euro and US Dollar
The Pound declined against the Dollar for the third straight day yesterday in the currency markets, while the UK currency lost ground against 15 out of the 16 most actively traded currencies, adding to declines from the previous session. Sterling is approaching its weakest level against the U.S Dollar in 10 months, after a report showed UK manufacturing unexpectedly contracted in January.
The report from the Office of National Statistics showed that factory output fell for the first time in five months, indicating that the sector is struggling to expand following the longest recession on record. Output was down 0.9% from the previous month, despite initial estimates of 0.2% expansion, and the Pound subsequently fell as much as 0.4% against the Dollar to a low of $1.4875.
The Prime Minister Gordon Brown has warned that the nation's recovery will be far from smooth of the coming months but vowed that "we will weather the storm together." Bank of England officials last week decided to keep the £200 bond-purchasing program on hold for a second month, as they assess the strength of the recovery.
BoE member Kate Barker said earlier this week that the UK faces a "bumpy" recovery and manufacturers haven't yet benefited from the drop in the value of the Pound. Sterling has fallen roughly 25% in the past three years on a trade weighted basis but the latest trade balance shows that the deficit is widening with exports down 6.9%.
Policy makers are divided on whether additional stimulus may be necessary to cement the recovery and prevent a relapse. David Tinsley, an economist at National Australia Bank and a former MPC official, said that "until the recovery in the Euro-zone gets more entrenched, the outlook for manufacturing is going to be fairly heavy weather. It's possible UK gross domestic product will be weak or a bit negative in the first quarter."
The Pound has failed to break back above the key resistance levels at 1.10 versus the Euro and 1.50 against the U.S Dollar, indicating that a move lower is increasingly likely. The UK currency declined heavily on Tuesday, after Fitch Ratings said that Britain is taking too long to cut its budget deficit and may be susceptible to a downgrade in its credit rating from top level status.
Concern over the UK elections have also weighed heavily on Sterling, amid speculation that Britain may have its first minority government since 1974. A hung parliament would make it extremely difficult for officials to cut the ever-widening budget deficit, currently above 12% of gross domestic product.
Jeremy Stretch, a senior currency strategist at Rabobank International, said that "sterling remains weak amid ongoing concerns over debt ratings and political dynamics." Concerns that Britain, which lagged well behind the U.S and the Euro-region in exiting the recession, will struggle to rein in its debt has made the Pound the worst performer this year among the 16-most actively traded currencies.
The National Institute for Social and Economic Research estimated that UK gross domestic product rose 0.3% in the three months to February, following a revised 0.6% increase the previous month. The data should maintain expectations that the economy is recovering, but doubts over the strength of the recovery are likely to remain.
Euro / US Dollar
The Euro slumped towards the support at $1.3550 against the Dollar yesterday but the U.S currency was unable to sustain a break below this level for a second consecutive day. The Euro also benefited from some easing of tensions surrounding the Greek debt position and the single currency pushed to highs above $1.3650 by the close of trading.
According to the former European Commission President Romano Prodi, the worst of Greece's financial crisis is past and other EU nations won't follow the same path. He said, "for Greece, the problem is completely over. I don't see any other case now in Europe. I don't think there is any reason to think the Euro system will collapse or will suffer greatly because of Greece."
A survey yesterday showed that investors are the most bullish on the Dollar since the collapse of Lehman Brothers Holdings Inc, amid speculation that the U.S economy will expand at a faster pace than in Europe and Japan. A number of analysts are predicting that the Dollar will rise over the next months.
U.S Federal Reserve policy will be an important focus over the coming week, with the latest FOMC meeting due to be held on March 16th. There have been further comments from Fed officials suggesting unease with the terminology stating that interest rates will be left at record low levels for an extended period.
Foreign Exchange Daily Insight - The Pound declines amid speculation of a credit rating downgrade
by Adam Solomon
Sterling / Euro and US Dollar
The Pound dropped against 15 out of the 16 most actively traded currencies yesterday in the foreign exchange markets, approaching the lowest level since May versus the U.S Dollar, amid reports that the recovery in the UK property market may be losing momentum. According to the data from the Royal Institution of Chartered Surveyors, the number of real-estate agents saying that house prices rose exceeded those reporting declines by just 17 percentage points.
Economists had expected a 30-point gap and the Pound dipped under the pivotal resistance level at $1.5000, after Fitch Ratings analysts Paul Rawkins and Chris Pryce said that the UK needs to make a stronger fiscal adjustment to help reduce the budget deficit. They recommended that the UK should reduce the deficit from 12% to 3% of gross domestic product by 2014-15.
Paul Robinson, a currency strategist at Barclays Plc, said that "the RICS housing data weighed on sterling. The Moody's report about UK banks was also deemed to be sterling negative." The UK currency weakened 0.7% against the Dollar to $1.4965 at the close of trading last night. It reached a low of $1.4784 on March 1st, the lowest level since May.
There has been constant speculation surrounding a downgrade in the UK credit rating. Moody's Investors Service said in a report yesterday that UK banks and lenders that haven't improved their funding position may have their credit rating cut, as government support for the industry is withdrawn.
A separate report from the Office of National Statistics showed that the UK trade deficit unexpectedly widened in January by the most in 17-months, led by a overall slump in exports. The gap in goods and services was £8 billion, the most since August 2008, as imports fell 1.6% and exports slumped 6.9%.
Bank of England policy maker Kate Barker said earlier this week that the UK economy has shown a "disappointing" response to the weakness of the Pound, which has fallen about a quarter in value over the past three years on a trade weighted basis. BoE officials have reiterated that they want gross domestic product to rely more on exporting, as the economy recovers from the worst recession on record.
Alan Clarke, an economist at BNP Paribas SA, said that "it gets the first quarter of 2010 off to a poor start. We had anticipated a long wait for the effects of the weaker Pound to feed through into stronger exports, and that is exactly what we're having. Overall, disappointing from the perspective of growth."
Euro / US Dollar
The Euro failed to make any headway against the Dollar yesterday and there was a renewed test of support close to the $1.36 level. The single currency endured further selling pressure during the European session with a low close to 1.3535, amid a fundamental lack of confidence in the Euro-zone economy.
There are concerns that the tensions engulfing Greece will spread to Portugal and Spain, bringing the economic recovery in the region to a grinding halt. Fitch Ratings Agency expressed caution over the medium-term outlook for Greece, while there was also evidence of increased tensions within the Greek government on plans for budget cuts.
The latest U.S consumer confidence index was generally weaker-than-expected and the overall mood of risk aversion continued to support the Dollar. There are no major U.S data releases until Thursday and the U.S currency has been unable to draw support on yield grounds. However, there will still be expectations that the U.S will out-perform the Euro-zone over the coming months, which will tend to underpin Dollar sentiment.
Data Released 10th March
U.K 09:30 - Industrial Production (January) - Manufacturing
U.K 15:00 - NIESR GDP Estimate (3 Mths to February)
Foreign Exchange Insight - The Pound declines against the major, amid further concerns over a minority government
by Adam Solomon
Sterling / Euro and US Dollar
The Pound initially gained some support against the Dollar yesterday in the foreign exchange markets, rising towards $1.5150 in London before a sharp retraction later in the day. The UK currency also peaked just above 1.11 versus the Euro, as a general improvement in risk appetite underpinned support. Political uncertainty remained an important factor, with the latest opinion poll still pointing to the risk of a minority government.
There will be continuing concerns that political factors that may prevent any significant short-term corrective action on the escalating UK budget deficit. Speculation surrounding a hung parliament will weigh heavily on Sterling in the build up to the election and the UK currency slipped back towards the major support levels at $1.50 against the Dollar and 1.10 versus the Euro.
The Pound failed to find any buying support later in the session, despite comments from Bank of England policy maker Kate Barker, who unexpectedly expressed some optimism that the UK economy is recovering. The differing views from a number of committee members is becoming increasingly apparent over the past few weeks, which will tend to deter strong sterling support.
In a speech to the National Institute of Economic and Social Research, Barker said that "there are grounds for optimism from recent data that the recovery is broadly on track. I don't think it is yet possible to be confident in the pace of the recovery and still expect the path to be bumpy. But some of the severe downside risks have diminished."
The Bank of England's unprecedented £200 billion asset purchase program has helped the economy rebound from the longest recession on record by cutting costs, supporting asset prices and boosting confidence. Barker also said that the Central Bank kept the plan's size on hold for a second month last week, as officials adopt a "wait and see" policy.
Her comments yesterday seem to lean towards further quantitative easing as she said that "I don't consider the evidence suggests that this rise in asset prices has gone too far and therefore do not believe that this has become another risk to future economic stability. My concern is that this channel might become less powerful if quantitative easing were to be extended."
UK stocks advanced yesterday, extending the biggest weekly jump since July for the FTSE 100 Index, which rose 0.1% in London. UK stocks have rallied 11% since February 5th, as UK companies, including Barclays Plc and RBS reported earnings that beat analysts' estimates and investors speculated that the European Union will bailout Greece.
The French President Nicolas Sarkozy said that the Euro-zone is ready to support Greece should the government struggle to fund its budget deficit, arguing that the country is "under attack" from speculators. In the UK, underlying confidence in the debt position is also under scrutiny and the Pound dropped to lows against the majority of the 16-most actively traded currencies.
According to Goldman Sachs Group Inc, the Pound's drop last week to the lowest level in 10-months against the Dollar may help the UK economy recover faster than the Euro-zone. Concerns over the UK elections this may result in the first minority government since 1974 and has contributed heavily to the Pound's 7% decline since December.
Erik F. Nielson, chief European economist at Goldman Sachs, said that "people are very bearish on the UK, probably more than they should be. The Euro is clearly in its biggest crisis since it started, so it's kind of strange that it's overvalued." The Pound dropped to the support at 1.10 versus the Euro last night and break below this level could spark a move towards 1.0750.
The Pound posted its third weekly decline against the Euro and the U.S Dollar on March 5th, as opinion polls stoked concern that the UK may elect a minority government, hampering efforts to rein in the budget deficit. National elections must be held by June and at more than 12% of gross domestic product, the UK budget gap is on a par with that of Greece.
The UK economy exited the recession in the fourth quarter, expanding just 0.3%, while inflation accelerated to the fastest pace in 14-months to 3.5% in January. Nielson added, "we think the UK will outperform the Euro-zone in growth terms. We have a constructive forecast for Sterling." Goldman Sachs forecast that the Pound will rise to $1.73 in six months.
Euro / US Dollar
The Euro struggled to hold on to recent gains against the Dollar yesterday, after the Greek Prime Minister George Papandreou said that the nation's fiscal crisis could spread beyond Europe unless "unprincipled speculators" are reined in. The Euro dipped to lows close to $1.36 against the Dollar during the U.S session before stabilising around $1.3625 at the close of trading last night.
The economic data with the Euro-region was largely mixed, as the Sentix business confidence index was slightly stronger-than-expected for March. There was also a surprising increase in German industrial orders but the overall market impact was muted. The improvement in risk appetite failed to sustain the initial optimism surrounding the Euro, as there were further downgrades for Portugal's main banks.
There were no major U.S economic data releases during the day and the Dollar gained support after the comments from the Greek Prime Minister. Former Federal Reserve Chairman Paul Volcker said that he was confident that the Euro would survive but the lack of a unified government to back up the ECB is a "structural crack".
Data Released 9th March
EU 09:30 - Sentix Investor Sentiment Index (March)
Foreign Exchange Market News - The Pound bounces back against the majors, amid reports that the recovery is gaining traction
by Adam Solomon
Sterling / Euro and US Dollar
Following on from last week, the Pound rose against the U.S Dollar on Thursday for the first time in six days, while the UK currency stood firm at the pivotal 1.10 support level versus the Euro, as reports indicated the economic recovery is gathering momentum, boosting the government's ability to tackle the budget deficit. Sterling strengthened against 14 out of the 16 most actively traded currencies, after Nationwide Building Society reported that consumer sentiment rose above expectations in February.
A separate report from the Chartered Institute of Purchasing and Supply showed that an index of UK services industries expanded at the fastest pace in three years last month, as the economy officially exited the longest recession on record. The UK economy expanded 0.3% in the revised estimate for the fourth quarter, largely driven by the improvement in services, which accounts for three quarters of output.
Alan Clarke, an economist at BNP Paribas SA, said that "financial and monetary conditions are extremely loose, helped by very low interest rates and the weakness of the Pound. These have clearly supported survey indicators such as the CIPS. In turn we expect this to be translated into robust gross domestic product growth for the first half."
Consumer confidence also increased last month, while a report earlier in the week showed that manufacturing activity held firm at the highest level in 15-years. The Bank of England last week held its £200 billion bond purchasing program and keep interest rates unchanged at a record low of 0.5%, as the MPC continue to adopt a wait and see policy.
The Pound has suffered widespread and sustained losses against all of the 16 most actively traded currencies last week, falling to a record low against the Australian Dollar, amid speculation that the general election will result in a minority government for the first time since 1974. The ruling Labour Party is narrowing the gap on the Conservatives' and the Pound is likely to struggle to stem the flow of losses in the build up to the May/June election.
Paul Robson, senior foreign exchange strategist at Royal Bank of Scotland Group Plc, said that "the pound has fallen an awfully long way in a short period of time, and the consumer confidence data provides a welcome positive. It may be time for people to square positions." The Pound rose 0.6% against the Dollar to $1.5065, up from $1.4971 on Tuesday.
The Pound's plunge represents the longest run of declines in 16 months, as the UK currency lost 7% against the U.S Dollar since the start of the year. Despite the modest consolidation yesterday, the UK currency is unlikely to continuing gaining momentum, as investors shun UK assets amid concern of a hung parliament and further quantitative easing.
According to former Treasury advisor Roger Bootle, an election resulting in a minority government may cause "mayhem" in UK currency and bond markets. "The morning after an election of that sort, then there would be mayhem in the markets. It would be a very uncomfortable ride. We might go through many weeks, perhaps months, in which the markets couldn't be sure."
The Pound fell to the lowest level in 10 months against the Dollar to $1.4784 on Monday and Bottle added that there has been "an awful lot of hysteria" over the UK currency's decline and an exchange rate of $1.50 against the Dollar is probably "fair value". The UK's budget deficit is roughly the same as Greece's, both exceeding 12% of GDP and credit rating agencies have reiterated that the UK may test the boundaries of its Aaa rating.
The Pound held steady above $1.5050 against the Dollar, prior to the Bank of England interest rate announcement at midday on Thursday. The UK currency failed to hold on to the recent gains and approached the lowest level in 10 months, after the Central Bank kept UK interest rates unchanged at a record low of 0.5%.
The Monetary Policy Committee, led by the Governor Mervyn King, also kept the bond-purchasing program on hold for a second consecutive month, as policy makers assessed whether the £200 billion spent so far is enough to prevent the economy from slipping back into a recession. The result of the announcement was widely anticipated and Sterling made gains against the Euro, after the ECB President Trichet described the benchmark rate as "appropriate".
The European Central Bank also left interest rates unchanged at a record low yesterday of 1% and Trichet also phased out some emergency measures used to fight the financial crisis, sticking to his exit strategy even after Greece's widening budget deficit rocked the market. The Federal Reserve have raised the discount lending rate to 0.75% over the past month and will next convene on March 16th.
The Pound strengthened against the Dollar and the Euro on Friday, after reports showed that the U.S economy lost fewer hibs last month than expected, stoking optimism that the global economic recovery is gathering momentum. The U.S labour department said that employers eliminated 36,000 jobs in February, despite initial forecasts of a 68,000 reduction.
Euro / US Dollar
The Euro rose to its highest level against the Dollar in two weeks last week, after Greece announced spending cuts and tax increases, spurring speculation that the nation can rein in the European Union's largest budget deficit. There will, however, still be concerns over internal opposition to budget cuts and the mood of confidence may not last beyond the short-term.
The Euro failed to extend gains against the Dollar in European trading on Thursday, and weakened toward the $1.3650 region, ahead of the ECB interest rate announcement. The single currency fell from a two week high against the Dollar, after the central bank kept interest rates on at 1% and extend some stimulus measures to cement the economic recovery.
Lee Hardman, a currency strategist at Bank of Tokyo Mitsubishi UFJ Ltd, said "the ECB remains cautious, withdrawing emergency liquidity only gradually. The Euro is forming a near-term base here." Trichet also commented in the accompanying press conference that IMF support for Greece would not be appropriate and these remarks tended to renew concern over the debt situation.
The U.S jobless claims data was largely in line with initial estimates, recording a decline to 469,000, from a revised 498,000 the previous week. The pending home sales data was weaker than expected with a 7.6% decline, following a series of robust reports during the second half of 2009. The Euro has maintained a firm tone against the Dollar, as the French President Sarkozy pledged support for Greece.
Data Released 8th March
EU 09:30 - Sentix Investor Sentiment Index (March)
Foreign Exchange Daily Insight - The Pound declines after the Bank of England keep rates on hold at 0.5%
by Adam Solomon
Sterling / Euro and US Dollar
The Pound held steady above $1.5050 against the Dollar yesterday in the foreign exchange markets, prior to the Bank of England interest rate announcement at midday. The UK currency failed to hold on to the recent gains and approached the lowest level in 10 months, after the Central Bank kept UK interest rates unchanged at a record low of 0.5%.
The Monetary Policy Committee, led by the Governor Mervyn King, also kept the bond-purchasing program on hold for a second consecutive month, as policy makers assessed whether the £200 billion spent so far is enough to prevent the economy from slipping back into a recession. The result of the announcement was widely anticipated and Sterling made gains against the Euro, after the ECB President Trichet described the benchmark rate as "appropriate".
Mervyn King said last week that the economy faces a "gradual recovery" from the longest recession on record, and he pledged to aid the pickup by purchasing more bonds if required. Sterling has declined heavily in the build up to the BoE announcement yesterday, amid speculation of further quantitative easing and the prospect of a hung parliament.
The Pound fell to the lowest level against the Dollar since May earlier this week, amid concern that Britain's election will fail to produce a government strong enough to tackle the deficit, now more than 12% of gross domestic product. The ruling Labour Party have narrowed the Conservatives lead to just five percentage points. If repeated at the election, that would give Britain its first minority government since 1974.
The election due in May/June overshadowed yesterday's decision, as concern over whether the government can control a budget deficit equivalent to Greece's pushed the Pound to its worst losing streak since October 2008. The UK currency approached a 10-month low against the Dollar, trading down 0.4% on the day.
Philip Shaw, chief economist at Investec Securities, said that "they're waiting for the recovery to gain some traction and there has been some evidence that this is the case. As the economy gains momentum, it's more likely than not that the level of asset purchases has reached its peak." The BoE has yet to remove stimulus a year after it started buying assets with newly created money.
The European Central Bank also left interest rates unchanged at a record low yesterday of 1% and Trichet also phased out some emergency measures used to fight the financial crisis, sticking to his exit strategy even after Greece's widening budget deficit rocked the market. The Federal Reserve have raised the discount lending rate to 0.75% over the past month and will next convene on March 16th.
Paul Robinson, a currency strategist at Barclays Capital, said "there's still pressure on the downside for the Pound in the near-term against the Dollar. We don't expect the Bank of England to increase asset purchases." The UK currency has lost 8% against the Dollar this year, and reached $1.4784 on March 1st, the lowest level since May.
According to a report from Halifax yesterday, UK house prices dropped in February for the first time in eight months, as more people flooded the market with homes for sale. The average cost of a home in the UK fell 1.5% from January to £166,857 and the report adds to evidence that the housing market recovery may be losing momentum, after mortgage approvals dropped in January to an eight month low.
Euro / US Dollar
The Euro failed to extend gains against the Dollar in European trading yesterday, and weakened toward the $1.3650 region, ahead of the ECB interest rate announcement. The single currency fell from a two week high against the Dollar, after the central bank kept interest rates on at 1% and extend some stimulus measures to cement the economic recovery.
Lee Hardman, a currency strategist at Bank of Tokyo Mitsubishi UFJ Ltd, said "the ECB remains cautious, withdrawing emergency liquidity only gradually. The Euro is forming a near-term base here." Trichet also commented in the accompanying press conference that IMF support for Greece would not be appropriate and these remarks tended to renew concern over the debt situation.
The U.S jobless claims data was largely in line with initial estimates, recording a decline to 469,000, from a revised 498,000 the previous week. The pending home sales data was weaker than expected with a 7.6% decline, following a series of robust reports during the second half of 2009. The U.S non-farm payroll data will be watched closely today and there is certainly a risk that bad weather conditions will trigger a weaker result.
Foreign Exchange Daily Currency News - The Pound rebounds against the Dollar for the first time in six days
by Adam Solomon
Sterling / Euro and US Dollar
The Pound rose against the U.S Dollar yesterday for the first time in six days, while the UK currency stood firm at the pivotal 1.10 support level versus the Euro, as reports indicated the economic recovery is gathering momentum, boosting the government's ability to tackle the budget deficit. Sterling strengthened against 14 out of the 16 most actively traded currencies, after Nationwide Building Society reported that consumer sentiment rose above expectations in February.
A separate report from the Chartered Institute of Purchasing and Supply showed that an index of UK services industries expanded at the fastest pace in three years last month, as the economy officially exited the longest recession on record. The UK economy expanded 0.3% in the revised estimate for the fourth quarter, largely driven by the improvement in services, which accounts for three quarters of output.
David Noble, chief executive at CIPS, said in a statement yesterday that "the services sector is pretty much firing on all cylinders now. February saw business activity surge at its fastest rate in over three years as the sector helps to drive the UK economy further out of recession."
Alan Clarke, an economist at BNP Paribas SA, said that "financial and monetary conditions are extremely loose, helped by very low interest rates and the weakness of the Pound. These have clearly supported survey indicators such as the CIPS. In turn we expect this to be translated into robust gross domestic product growth for the first half."
Consumer confidence also increased last month, while a report earlier in the week showed that manufacturing activity held firm at the highest level in 15-years. The Bank of England will today hold its £200 billion bond purchasing program and keep interest rates unchanged at a record low of 0.5%, as the MPC continue to adopt a wait and see policy.
The Pound has suffered widespread and sustained losses against all of the 16 most actively traded currencies this week, falling to a record low against the Australian Dollar, amid speculation that the general election will result in a minority government for the first time since 1974. The ruling Labour Party is narrowing the gap on the Conservatives' and the Pound is likely to struggle to stem the flow of losses in the build up to the May/June election.
Paul Robson, senior foreign exchange strategist at Royal Bank of Scotland Group Plc, said that "the pound has fallen an awfully long way in a short period of time, and the consumer confidence data provides a welcome positive. It may be time for people to square positions." The Pound rose 0.6% against the Dollar to $1.5065, up from $1.4971 on Tuesday.
The Pound's plunge represents the longest run of declines in 16 months, as the UK currency lost 7% against the U.S Dollar since the start of the year. Despite the modest consolidation yesterday, the UK currency is unlikely to continuing gaining momentum, as investors shun UK assets amid concern of a hung parliament and further quantitative easing.
According to former Treasury advisor Roger Bootle, an election resulting in a minority government may cause "mayhem" in UK currency and bond markets. "The morning after an election of that sort, then there would be mayhem in the markets. It would be a very uncomfortable ride. We might go through many weeks, perhaps months, in which the markets couldn't be sure."
The Pound fell to the lowest level in 10 months against the Dollar to $1.4784 on Monday and Bootle added that there has been "an awful lot of hysteria" over the UK currency's decline and an exchange rate of $1.50 against the Dollar is probably "fair value". The UK's budget deficit is roughly the same as Greece's, both exceeding 12% of GDP and credit rating agencies have reiterated that the UK may test the boundaries of its Aaa rating.
UK stocks climbed for a fourth straight day yesterday, after Standard Chartered Plc rose 5.3% in London, after the UK bank, which makes more than 90% of pre-tax earnings in Asia, said full-year profit increased as company lending rose. The benchmark FTSE 100 Index gained 0.9% on the day and the increase in risk appetite is likely to support the higher-yielding currencies, such as the Australian Dollar and South African Rand.
Euro / US Dollar
The Euro rose to its highest level against the Dollar in two weeks yesterday, after Greece announced spending cuts and tax increases, spurring speculation that the nation can rein in the European Union's largest budget deficit. There will, however, still be concerns over internal opposition to budget cuts and the mood of confidence may not last beyond the short-term.
The European Central Bank governing council meeting will be heavily scrutinised this afternoon, as policy makers are expected to keep interest rates unchanged. The chairman Jean-Claude Trichet is due to deliver a statement after the announcement and any negative comments on the Greek situation will be watched closely.
The U.S Dollar fell against a basket of currencies, as commodities rallied, reducing the allure of the Dollar as a safe haven asset. The ADP employment report recorded a decline in private sector jobs of 20,000 for February, following a revised 60,000 decline for January and the report will provide an insight into non-farm payrolls released on Friday.
Foreign Exchange Insight - The Pound stabilises against the Dollar, after falling to the lowest level since May
by Adam Solomon
Sterling / Euro and US Dollar
The Pound declined against the U.S Dollar for a sixth consecutive day yesterday, its longest run of losses in more than 16-months, amid concern that the general election will result in a minority government for the first time since 1974. The UK currency fell against 14 out of the 16 most actively traded currencies, after a poll on Monday showed that the Conservatives' lead over the ruling Labour party narrowed to just 2 points.
Sterling was unable to regain the pivotal $1.50 level against the Dollar, but was able to resist a further test of support below $1.48, as there seemed an underlying tone of consolidation following sharp losses on Monday. The Pound also tested support at 1.10 versus the Euro and a break below this level appears likely, ahead of the Bank of England interest rate announcement on Thursday.
Underlying sentiment remains weak, but a substantial amount of bad news has been priced into the market. The construction PMI index remained below the 50 level, which maintained concern over the building sector. Recent comments from Bank of England officials has suggested a wide range of viewpoints within the monetary policy committee but we expect the central bank to keep rates on hold. There will be speculation over further quantitative easing and uncertainty will tend to keep Sterling on the defensive ahead of the announcement.
Jeremy Stretch, a currency strategist at Rabobank International, said that "new UK opinion polls are re-emphasising the political dynamic, which is a sterling negative. Investors will prefer the safer haven of the Dollar in this type of environment." The Pound remained largely unchanged around $1.4660 against the Dollar, after dropping to a low of $1.4784 on Monday, the lowest level since May 1st.
In fact, Sterling had its biggest drop against the Dollar since October 23rd, based on closing prices, as February 28th YouGov Plc poll showed that the Conservatives' lead narrowed to just two percentage points. A separate poll from ComRes Ltd yesterday showed that the Tory lead was five points and the election must be held by June at the latest.
A hung parliament would make it very difficult to tackle the nation's widening budget deficit, a concern that will undermine confidence in the Pound over the coming months. Hans Guenter Redeker, global head of foreign exchange strategy at BNP Paribas SA, said that "it looks like we might have a government which is not going to be driven by a broader majority, and under those circumstances, the possibility of having a successful and decisive budget consolidation is very slim."
Gordon Brown's government is selling a record amount of debt to finance fiscal stimulus measures introduced last year to help the economy recover from the longest recession on record. According to Fukoku Mutual Life Insurance Co, the UK's widening budget deficit may see the Pound plunge to $1.20, the weakest level since 1985, and slide to parity with the Euro.
UK stocks gained for a third day yesterday, erasing this year's decline for the FTSE 100 Index, after British Airways soared by the most since November and ICAP Plc, the world's largest broker of transactions between banks, rallied 4.6%. The benchmark FTSE 100 Index surged 1.5% in London to the highest closing position in over a month.
Euro / US Dollar
The Euro rallied yesterday from its lowest level against the Dollar since May, after the Greek government said it will announce new deficit cuts tomorrow, increasing speculation that a solution to its debt crisis may be nearing. The single currency dipped to fresh lows earlier in the day, after EU Monetary Affairs Commissioner Olli Rehn said that Greece must reveal new measures "in the coming days."
Kathy Lien, director of currency research at GFT Froex, said that "the talk that Greece will announce new deficit cuts is giving the market fundamental reason to rally the Euro. Any hint of a bailout or new deficit cuts is enough to push it higher." The Euro gained 0.3% to $1.3606 against the Dollar, after falling as much as 0.9% to the lowest level since May.
The flash Euro-zone estimate for consumer prices dripped to 0.9% for February, compared with expectations of 1%. There were no significant U.S economic data released yesterday but the focus this afternoon will fall on the ADP employment report, which is expected to provide some insight into non-farm payrolls on Friday.
Data Released 3rd March
U.K 00:01 - Nationwide Consumer Confidence (Feb)
U.K 09:28 - CIPS Services PMI (Feb)
EU 08:58 - Markit Services PMI (Feb)
EU 10:00 - Retail Sales (Jan)
U.S 13:15 - ADP Employment (Feb)
U.S 15:00 - ISM Non-Manufacturing (Feb)
U.S 19:00 - Federal Reserve Bank Publishes Beige Book
Foreign Exchange News Flash - Sterling plummets to lowest level since May 2009
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."
Foreign Exchange Insight - The Pound may be poised for further declines, amid concern over a hung parliament
by Adam Solomon
Sterling / Euro and US Dollar
Following on from last week, the Pound plunged to the lowest level in nine months against the Dollar, falling almost 3% to $1.5098 in London, while the UK currency also fell to a low of 1.1110 versus the Euro. Sterling actually recorded sharp losses against 14 out of the 16 most actively traded currencies last week, as investors added to bets that the Bank of England will keep rates at a record low of 0.5% for the remainder of the year.
The increase in risk aversion may result in the Pound falling under $1.50 against the Dollar, amid speculation that ratings companies will have to downgrade Greece's debt, stirring concern that Britain may struggle to reduce its own budget deficit. Standard & Poor's and Moody's Investors Service said that Greece, which has the EU's largest deficit, faces downgrades as early as next month.
At more than 12% of gross domestic product, the UK budget deficit is on a par with that of Greece and there is an inherent risk of a downgrade in the UK credit rating this year. Jeremy Stretch, a currency strategist at Rabobank International, said that "sterling is being seen in the risk bucket and risk is off the agenda right now. Investors are taking bets on rate hikes off the table."
The government is selling a record amount of debt to finance fiscal stimulus measures designed to help the economy recover from the longest recession ever recorded. Bruce Stout of Murray International Trust, said that "we're very, very aware of the risk the UK is carrying. Debt is a horrible thing. Sterling is a very vulnerable currency."
The Monetary Policy Committee, led by Mervyn King, voted unanimously this month to pause the unprecedented bond-purchasing program, after officials spent £200 billion worth of securities to drag the economy out of the longest recession on record. However, King indicated to the Treasury Select Committee that the Central Bank may resume quantitative easing at some stage this year and dispelled any suggestion of a near-term rate increase.
BoE policy maker Adam Posen also said yesterday that the Central Bank may expand the asset purchase program if the economic recovery fails to gather momentum. He told journalists "if there's another negative shock, or if things collapse and don't work out the way we thought, then we're going to have to do more stimuli."
Policy makers paused the bond purchasing plan in February, as they judged the strength of the recovery at a time when inflation was accelerating and rising jobless claims clouded the outlook just a few months before the election. Posen also said that the Pound has stabilised recently and there is no reason to think its exchange rate will move a lot from the current levels.
The Pound has declined roughly a quarter against a trade-weighted basket of currencies in the past three years and is currently 8.3% higher than a low reached on December 30th 2008. The overall decline in Sterling has, however, improved UK exports and domestic spending, fuelling speculation that officials would prefer a weaker Pound.
UBS AG predicted earlier in the week that the Pound may fall below parity with the Euro and drop to $1.05 versus the Dollar, the lowest level since the mid-1980s, if the government tackles the UK's debt problems too early. The lingering threat of a hung parliament is also hampering the Pound, as the Conservatives, who have called for spending cuts to start this year, are still just nine points ahead of the Labour Party in the latest polls and their lead is slipping
The Pound is currently trading at the lowest level against the Dollar since May last year, a trend that may continue in the short-term. The UK currency has also lost ground versus the struggling Euro, trading down towards the long-term support level around 1.1280, as polls showed that the UK may have its first minority government since 1974, hampering efforts to cut the nation's record deficit.
Sterling has extended its decline against the Dollar this year to 6.47%, and has depreciated against all of the 16 most actively traded currencies, as a poll showed that the Conservatives' lead is the smallest over the ruling Labour Party in two years. The General Election must be held by June and futures traders are increasing their bets that the Pound will decline further against the Dollar.
Audrey Childe-Freeman, a senior currency strategist at Brown Brothers Harriman Ltd, said "the political development added to the negative sentiment about the Pound. Political uncertainty means the risk of a hung parliament is increasing. You will need a government with a strong majority to push ahead with reforms that the UK needs. We are bearish on the Pound."
Euro / US Dollar
The Euro declined against the Dollar last week, as credit rating agencies said that Greece faces further downgrades as early as next month. The Prime Minister George Papandreou is struggling to cut the EU's largest budget deficit and the Euro has lost 2.7% versus the resurgent Dollar in February alone. Carl Heinz Daube, head of Germany's debt agency said that "the bankruptcy of a euro-region country would spell the end of the European monetary union."
Richard Franulovich, a senior currency strategist at Westpac Banking Corp, said that EU leaders "know the consequences would just be earth-shattering if they let a default go to the wall so they'll sort someting out in the end. Obviously it's got to get a lot worse before it gets better. The Euro may trade as low as $1.10 in the next nine months."
European stocks dropped the most in almost three weeks, as the Dow Jones Stoxx 600 Index lost 1.6%, amid concern over budget deficits in Greece, Spain and Portugal, while China moved to restrict lending to stop its economy from overheating. An index of European confidence also unexpectedly weakened in February, as the recovery almost stalled in the fourth quarter.
According to analysts at Royal Bank of Scotland Group Plc, the Euro may strengthen to $1.40 against the Dollar, as European officials work on a rescue package for Greece, easing concern of "default and contagion." The single currency is also poised to advance, after futures traders placed a record amount of bets that it will weaken.
Data Released 1st March
U.K 00:01 - Hometrack House Prices (February)
U.K 09:28 - CIPS Manufacturing PMI (February)
U.K 09:30 - Consumer Credit (January)
U.K 09:30 - Mortgage Applications (January)
EU 08:58 - Markit Manufacturing PMI (February)
EU 10:00 - Unemployment (January)
U.S 13:30 - Personal Income / Consumption (January) - Core PCE
Foreign Exchange - The Pound declines heavily on speculation interest rates will remain at 0.5% this year
by Adam Solomon
Sterling / Euro and US Dollar
The Pound plunged to the lowest level in nine months against the Dollar yesterday in the foreign exchange markets, falling 1.1% to $1.5245 in London, while the UK currency also fell to the Fibonacci support level at 1.1280 versus the Euro. Sterling actually recorded sharp losses against 14 out of the 16 most actively traded currencies, as investors added to bets that the Bank of England will keep rates at a record low of 0.5% for the remainder of the year.
The increase in risk aversion may result in the Pound falling towards $1.50 against the Dollar, amid speculation that ratings companies will have to downgrade Greece's debt, stirring concern that Britain may struggle to reduce its own budget deficit. Standard & Poor's and Moody's Investors Service said that Greece, which has the EU's largest deficit, faces downgrades as early as next month.
At more than 12% of gross domestic product, the UK budget deficit is on a par with that of Greece and there is an inherent risk of a downgrade in the UK credit rating this year. Jeremy Stretch, a currency strategist at Rabobank International, said that "sterling is being seen in the risk bucket and risk is off the agenda right now. Investors are taking bets on rate hikes off the table."
The government is selling a record amount of debt to finance fiscal stimulus measures designed to help the economy recover from the longest recession ever recorded. Bruce Stout of Murray International Trust, said that "we're very, very aware of the risk the UK is carrying. Debt is a horrible thing. Sterling is a very vulnerable currency."
UBS AG predicted earlier this week that the Pound may fall below parity with the Euro and drop to $1.05 versus the Dollar, the lowest level since the mid-1980s, if the government tackles the UK's debt problems too early. The lingering threat of a hung parliament is also hampering the Pound, as the Conservatives, who have called for spending cuts to start this year, are still just nine points ahead of the Labour Party in the latest polls.
Elsewhere, UK stocks also retreated yesterday, as mining companies followed metal prices lower, while an unexpected increase in U.S jobless claims raised concern that the global economic recovery may relapse. The benchmark FTSE 100 Index lost 0.8% yesterday and is 2.2% lower this year, amid concern over the UK debt position.
The Pound is currently trading at the lowest level against the Dollar since May last year, a trend that may continue in the short-term. The UK currency has also lost ground versus the struggling Euro, trading down towards the long-term support level around 1.1280.
The focus this morning will largely fall on the revised GDP numbers for the fourth quarter, and although the report is expected to show a marginal revision higher, anything less than 0.1% growth would mean the UK economy failed to exit the recession in the fourth quarter. The Pound would come under significant selling pressure, as the Bank of England may be forced to resume the bond purchasing plan to sure up the recovery.
Euro / US Dollar
The Euro declined against the Dollar yesterday, as credit rating agencies said that Greece faces further downgrades as early as next month. The Prime Minister George Papandreou is struggling to cut the EU's largest budget deficit and the Euro has lost 2.7% versus the resurgent Dollar in February alone. Carl Heinz Daube, head of Germany's debt agency said that "the bankruptcy of a euro-region country would spell the end of the European monetary union."
Richard Franulovich, a senior currency strategist at Westpac Banking Corp, said that EU leaders "know the consequences would just be earth-shattering if they let a default go to the wall so they'll sort someting out in the end. Obviously it's got to get a lot worse before it gets better. The Euro may trade as low as $1.10 in the next nine months."
European stocks dropped the most in almost three weeks yesterday, as the Dow Jones Stoxx 600 Index lost 1.6%, amid concern over budget deficits in Greece, Spain and Portugal, while China moved to restrict lending to stop its economy from overheating. An index of European confidence also unexpectedly weakened in February, as the recovery almost stalled in the fourth quarter.
Foreign Exchange Daily Insight - The Pound declines against the majors, as policy makers unite on further asset purchases
by Adam Solomon
Sterling / Euro and US Dollar
The Pound fell 0.4% against the Euro yesterday, trading at a low of 1.1350 in London, while the UK currency also lost ground against the higher yielding currencies, including the Australian and New Zealand Dollar. UK stocks bounced back after declining for only the second time in ten days on Tuesday, as shares of Carnival Plc, Lloyds Banking Group Plc and HSBC Holdings Plc rallied.
UK government bonds also rose for a third straight day, after investors bought £7.5 billion of securities this week, amid speculation that the Bank of England will keep interest rates at record low levels. The Governor Mervyn King said yesterday that policy makers are willing to do "whatever seems appropriate" to prevent the UK economy from slipping back into a recession.
The Monetary Policy Committee, led by Mervyn King, voted unanimously this month to pause the unprecedented bond-purchasing program, after officials spent £200 billion worth of securities to drag the economy out of the longest recession on record. However, King indicated to the Treasury Select Committee that the Central Bank may resume quantitative easing at some stage this year and dispelled any suggestion of a near-term rate increase.
BoE policy maker Adam Posen also said yesterday that the Central Bank may expand the asset purchase program if the economic recovery fails to gather momentum. He told journalists "if there's another negative shock, or if things collapse and don't work out the way we thought, then we're going to have to do more stimuli."
Policy makers paused the bond purchasing plan in February, as they judged the strength of the recovery at a time when inflation was accelerating and rising jobless claims clouded the outlook just a few months before the election. Posen also said that the Pound has stabilised recently and there is no reason to think its exchange rate will move a lot from the current levels.
The Pound has declined roughly a quarter against a trade-weighted basket of currencies in the past three years and is currently 8.3% higher than a low reached on December 30th 2008. The overall decline in Sterling has, however, improved UK exports and domestic spending, fuelling speculation that officials would prefer a weaker Pound.
According to analysts at UBS AG, the Pound may fall below parity with the Euro and drop to $1.05, the lowest level against the Dollar since the mid-1980s, if the government tackles the country's debt burden too early. Mansoor Mohi-Uddin, chief currency strategist at UBS in Singapore, said yesterday that "if the next government was to prematurely curb the fiscal deficit, without the economy reaching a surer footing, the consequences for sterling would be grave."
Elsewhere, Credit Agricole CIB predict that the Euro and the Pound will "struggle" against other major currencies on concern the European economy will worsen and budget deficits in the region will widen. Mitul Kotecha, head of global foreign exchange strategy, said that the Euro is likely to encounter resistance around $1.3747 and the Pound may drop to $1.5293.
Euro / US Dollar
The Dollar declined for the first time in three days against the Euro yesterday, as the Federal Reserve chairman Ben Bernanke said that the U.S economy is in a "nascent" recovery that still needs low interest rates. The U.S currency subsequently weakened against 13 out of the 16 most actively traded currencies and continued to decline as U.S new home sales unexpectedly plummeted to lowest level on record.
Andrew Wilkinson, a senior market analyst at Interactive Brokers Group, said that the Dollar's upward move is losing momentum. "The dollar has been rising both on safe haven fears and the expectation the Fed will move rates faster. That trade has run out of steam." The Dollar fell 0.2% against the Euro yesterday to $1.3529 in New York, after rising 0.7% the previous day.
Purchases of new homes declined 11% to an annual pace of 309,000, well below initial forecasts, as sentiment remains weak. U.S stocks also rose yesterday, marking the biggest gain in more than a week on the S&P 500 Index, weakening demand for the Dollar as a safe haven. Elsewhere, Euro-zone industrial orders unexpectedly rose for a second month in December, led by a surge in demand for capital goods.
Foreign Exchange Update - The Pound declines against the majors, as King says a return to QE likely
by Adam Solomon
Sterling / Euro and US Dollar
The Pound declined against the Euro yesterday in the foreign exchange markets, while the UK currency also plunged 1% from a high of $1.5574 versus the U.S Dollar, after the governor of the Bank of England Mervyn King said that officials are willing to do "whatever seems appropriate" to prevent an economic relapse in the fragile UK economy.
King said in his testimony to Parliament's Treasury Committee that "our central view is still that the most likely set of outcomes are along paths which involve gradual recovery. But anyone who has lived through the last two years will surely know there must be enormous uncertainty on either side of that."
On numerous occasions over the past year, Mervyn King has sought to remind investors just how fragile the UK economy is, leading to speculation that policy makers are intentionally trying to weaken the Pound to improve export demand. King's comments yesterday immediately had a strong and telling impact in the market, amid speculation that the BoE will expand the quantitative easing program.
Former Treasury advisor Roger Bootle also weighed in yesterday and said that the UK economy is entering a "very grave stage" and the Bank of England should expand its £200 billion bond purchasing plan to fight the risk of a relapse. King concluded that "monetary policy can either be more expansionary or more contractionary as the situation demands. We stand ready to do whatever seems appropriate."
The Pound fell to a low of $1.5396 against the U.S Dollar in London, while the UK currency declined against a basket of currencies, including the Australian and New Zealand Dollar. King conceded that the effect of the bond purchasing plan has yet to fully come through but investors are shunning UK assets, amid speculation that policy makers will resume quantitative easing at some stage this year.
UBS AG cut its three month forecast for the Pound against the Dollar earlier this year, citing the prospect of further asset purchases. Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ, said that "I see a potential downside risk" for sterling. "The Pound is one of the weakest currencies."
The Pound declined 0.6% against the Euro yesterday, before staging a modest recovery later in the day. The UK currency may continue to lose ground in the near term, amid concerns over the escalating budget deficit, further quantitative easing and the threat of a 'hung' parliament come the result of the general election in May/June.
The UK inflation rate rose to 3.5% in January, pushed higher by an increase in sales tax, oil costs and the general weakness of the Pound. Policy makers predict that inflation will return to the 2% target and will likely undershoot it over the next three years. King said that "we don't want to run the risk of inflation expectations moving up and being dislodged from the target."
Deputy governor of the BoE Paul Tucker also said yesterday that the BoE can't be comfortable about the recent acceleration in inflation. "It will take at least until the middle of the year for us to have much of a sense of whether growth will be anemic or robust enough to begin to absorb the slack in the economy."
Underlying confidence in the Pound will remain weak, as concerns over the UK debt position persist and there was also a weaker than expected reading for mortgage approvals, which fell sharply in January. There was a low close to $1.54 against the Dollar last night and the Pound found some support, while the UK currency remained resilient against the Euro, pipping above 1.14 at the close of trading.
The Pound also bounced back from the lowest level in 25-years against the Australian Dollar yesterday, as UK stocks dropped after a report in the U.S showed that consumer confidence in February fell to the lowest level since April 2009. The benchmark FTSE 100 Index dropped 0.7%, having gained as much as 0.8% earlier in the day.
Euro / US Dollar
The Euro pushed higher against the majors in early trading yesterday, reaching a high near $1.37 against the Dollar, prior to a report on German business confidence. The Ifo index was actually weaker than initial estimates with a decline to 95.2 in February but the data is likely to be distorted by bad weather conditions.
Nevertheless, the disappointing report reinforces the distinct lack of confidence in the Euro-zone economy and pushed the Euro significantly weaker. There was also continuing fears surrounding Greece, as credit rating for the commercial banks were downgraded and underlying Euro sentiment remained negative.
The U.S economic data was also weaker than expected, as consumer confidence dipped sharply for February, as confidence in the labour market deteriorated. Interest rate expectations will tend to be scaled back further, especially with regional Federal Reserve president Bullard stating that policy may not be tightened this year.
Foreign Exchange Update - The Dollar declines amid a revival in global stock market sentiment
by Adam Solomon
Sterling / Euro and US Dollar
The Pound recorded gains against a basket of currencies yesterday in the foreign exchange markets, as the UK currency recovered some of the losses from last week, amid a fundamental lack of market indicators. Sterling peaked just above $1.55 against the Dollar yesterday and hit a high of 1.14 versus the Euro but the Pound may struggle to stem the flow of investors shunning UK assets.
The yield on the 10-year gilt stated close to the highest level since November 2008, as an opinion poll added to recent speculation that this year's general election will fail to produce an outright winner. According to the poll by YouGov Plc, the Conservatives lead of the Labour Party has been reduced to its narrowest since December 2008.
Jim Reid, a strategist at Deutsche Bank AG, said that poll result would place the UK "firmly in hung parliament territory. The UK needs a credit deficit reduction plan as soon as possible, and any political uncertainty could lead to delays and worrying wobbles in the gilt market and/or sterling."
The political debate over how to tame the deficit has taken centre stage as some investors and the Conservatives argue that Britain could lose its top level credit rating. At more than 12% of gross domestic product, the UK budget deficit is on a par with that of Greece where bonds have plunged, amid concerns that the country may be unable to sustain itself.
Standard & Poor's lowered its outlook on Britain's AAA rating to negative from stable in May last year and said that its stance is unchanged after yesterday's figures. The Pound weakened against 14 of its 16 most actively traded currencies, after the Bank of England said that it may "provide further monetary stimulus" if warranted.
The Pound plummeted against all 16 of the most actively traded currencies last week, amid speculation that the Bank of England will be forced to resume quantitative easing at some stage this year, while the U.S is leading other nations in withdrawing emergency stimulus measures. The UK currency slipped to a nine-month low against the Dollar, after the Fed unexpectedly raised the rate charged to banks for direct loans.
The government is selling a record amount of debt to finance fiscal stimulus measures that were introduced last March to help the economy weather the longest recession on record. Although the Bank of England confirmed that it would halt quantitative easing earlier this month, policy makers have left the door open for further stimulus should the economy relapse into a recession.
According to analysts at Royal Bank of Scotland Group Plc, investors should consider betting that the Euro will rally against the Pound, amid growing concern that the UK will struggle to contain its budget deficit. Greg Gibbs said that "we may now be at a degree of extreme bearishness that a significant bounce in the euro is more likely. The same cannot be said for the Pound."
Euro / US Dollar
The Dollar declined against the so-called higher-yielding currencies yesterday, as a revival in global stock markets encouraged investors away from the relative security of dollar denominated assets. The U.S currency also lost ground versus the Euro, amid speculation that a stagnant U.S labour market will keep the Federal Reserve from raising interest rates in the short-term.
Nick Bennenbroek, head of currency strategy at Wells Fargo & Co, said that "there is risk-taking coming back into the market. The equity markets are doing quite well and that's helping some of the higher-yielding currencies." The Standard & Poor's 500 Index gained a further 0.3% in New York, rising for a fifth straight day and extending last week's rally.
The Fed chairman Ben Bernanke may tell Congress this week that the increase in the discount lending rate isn't intended to drive up borrowing costs. Fed officials last month forecast growth of 2.8% to 3.5% this year, while the minutes of the January meeting showed they are seeking more evidence that the recovery is sustainable.
Elsewhere, futures traders are signaling that the Euro's slump to a nine-month low will continue even if the European Union bails out Greece. Short-term rates for borrowing in euros in the futures market are the cheapest relative to loans in Dollars since September. Traders are betting that the ECB will keep interest rates a record low, sacrificing euro strength to prevent deficit cutting by debt laden economies in the region.
Foreign Exchange Market News - The Pound declines against the majors, as Britain posts its first budget deficit for January
by Adam Solomon
Sterling / Euro and US Dollar
Following on from last week, the Pound declined heavily against the U.S Dollar on Friday, falling to a low of $1.5373 during the Asian trading session. The UK currency also lost 1% versus the Euro, amid speculation that the UK's fragile economic recovery will trail that of the U.S, as Britain recorded its first budget deficit for January since the monthly data began in 1993.
Government spending exceeded revenue by 4.3 billion last month and the Pound fell after the release showed Britain failed to generate a surplus in the biggest tax collection month of the year, as the health of public finances around Europe attract investor scrutiny. James Knightly, an economist at ING Financial Markets, said that "this is potentially very worrying. Given concerns about public deficits around Europe at the moment, this could put the UK back in the spotlight."
The political debate over how to tame the deficit has taken centre stage as some investors and the Conservatives argue that Britain could lose its top level credit rating. At more than 12% of gross domestic product, the UK budget deficit is on a par with that of Greece where bonds have plunged, amid concerns that the country may be unable to sustain itself.
Standard & Poor's lowered its outlook on Britain's AAA rating to negative from stable in May last year and said that its stance is unchanged after yesterday's figures. The Pound weakened against 14 of its 16 most actively traded currencies, after the Bank of England said that it may "provide further monetary stimulus" if warranted.
Jeremy Stretch, a currency strategist at Rabobank International, said that "the market doesn't need much reminding of the weak fiscal situation in the UK. The risk of more quantitative easing should weigh on sterling." The Pound depreciated over 2% versus the Dollar during the past couple of days, a trend that looks set to continue in the short-term, as we approach the lowest level since May.
Britain is selling record amounts of debt to cover the budget deficit, after the Chancellor of the Exchequer Alistair Darling introduced stimulus measures to haul the UK economy out of the longest recession on record. While the Bank of England hasn't ruled out buying more bonds to revive the economy, the Federal Reserve has raised the discount lending rate.
The Bank of England last week cuts its forecast for annual gross domestic product growth to about 3.2% for the second quarter of 2011, compared with about 4% previously. The Pound may come under further selling pressure this morning, as a report from the Office of National Statistics is expected to show that UK retail sales missed analysts' expectations in January.
Earlier in the week, the Pound rallied strongly against the Euro yesterday, peaking just above 1.15 in London, while the UK currency also hit a high of $1.5814 versus the Dollar. The minutes from the Bank of England's last policy setting meeting showed that the committee voted unanimously to pause on the unprecedented £200 billion bond purchasing program.
In the accompanying statement, the minutes said that "the February projections did not imply an overwhelming risk of inflation being below the target over the forecast period, and so did not suggest an immediate need for a further relaxation of the policy stance. For some member, the arguments were finely balanced."
Policy makers have to balance the strength of the economy against rising inflationary pressures, as unemployment clouds the outlook just a few months before the general election. Peter Dixon, an economist at Commerzbank AG, said the vote "was a signal that the Bank won't have to engage in any further action unless the economy tanks. I personally think there won't be any further purchases."
Inflation accelerated way beyond initial estimates in January to 3.5%, the fastest pace in 14-months and the rate's increase of more than a percentage point from the Bank of England's 2% target forced Mervyn King to write a public letter of explanation to the Chancellor Alistair Darling. The nine-member monetary policy committee were also unanimous on the decision to keep interest rates at a record low of 0.5%.
The Pound plummeted against all 16 of the most actively traded currencies on Friday, amid speculation that the Bank of England will be forced to resume quantitative easing as some stage this year, while the U.S is leading other nations in withdrawing emergency stimulus measures. The UK currency slipped to a nine-month low against the Dollar, after the Fed unexpectedly raised the rate charged to banks for direct loans.
Brian Kim, a currency strategist at UBS AG, said that "risks have grown that the Bank of England will be left behind as other G-10 central banks begin the process of policy normalisation. Medium term downside risks for sterling have increased." Barclays Plc cut its forecast for the Pound on Friday, citing Britain's "monetary policy and fiscal concerns."
Elsewhere, the Pound also declined after a report from the Office of National Statistics showed that UK retail sales dropped more than twice as much as initial estimates in January, as the winter weather conditions reduced spending on the high street. Sales excluding petrol fell 1.2% from December, as the longest cold snap since 1981 brough the country to a stand still.
Euro / US Dollar
The Dollar rose towards the highest level in nine-months against the Euro last week, amid signs that the U.S economy is gaining momentum, after GDP rose 5.6% in the fourth quarter. The U.S currency advanced against 14 out of the 16 most actively traded currencies yesterday, on speculation that the Federal Reserve will be one of the first major central banks to remove stimulus measures.
U.S housing starts rose in January to a higher level than initial estimates, a sign that government support has helped stabilise the property market. Builders broke ground on 591,000 homes last month at an annual rate, up 2.8% from December. The extension and expansion of a homebuyer tax credit may boost demand over the coming months.
Elsewhere, industrial production in the U.S also rose more than predicted in January, indicating that factories were leading the recovery at the beginning of the year. Output climbed 0.9%, after a 0.7% increase the previous month, as rising overseas demand and efforts to replenish inventories will help keep factory production expanding over the coming months.
According to analysts at Citigroup Inc, the Euro may give up its gains against the Dollar, after EU finance ministers failed to agree on a concrete rescue package to help Greece plug its budget deficit. Ministers in the Euro-zone said after a two-day meeting in Brussels that they wants guarantees that Greece will be able to cut spending before they offer details on an aid package.
The Euro rose as much as 1.3% on Tuesday, its biggest gain in over a week, after Greek Finance Minister George Papaconstantinou said that the government doesn't need a bailout. However, the Dollar resumed its upward momentum against the Euro, after minutes from the Fed's last policy meeting showed some officials pushed to start selling assets in the near future, as a means to shrink the bank's balance sheet.
Foreign Exchange News Flash - The Pound declines heavily against the U.S Dollar
by Adam Solomon
Sterling / Euro and US Dollar
The Pound declined heavily against the U.S Dollar yesterday in the foreign exchange markets, falling to a low of $1.5373 during the Asian trading session. The UK currency also lost 1% versus the Euro, amid speculation that the UK's fragile economic recovery will trail that of the U.S, as Britain recorded its first budget deficit for January since monthly data began in 1993.
Government spending exceeded revenue by 4.3 billion last month and the Pound fell after the release showed Britain failed to generate a surplus in the biggest tax collection month of the year, as the health of public finances around Europe attract investor scrutiny. James Knightly, an economist at ING Financial Markets, said that "this is potentially very worrying. Given concerns about public deficits around Europe at the moment, this could put the UK back in the spotlight."
The political debate over how to tame the deficit has taken centre stage as some investors and the Conservatives argue that Britain could lose its top level credit rating. At more than 12% of gross domestic product, the UK budget deficit is on a par with that of Greece where bonds have plunged, amid concerns that the country may be unable to sustain itself.
Standard & Poor's lowered its outlook on Britain's AAA rating to negative from stable in May last year and said that its stance is unchanged after yesterday's figures. The Pound weakened yesterday against 14 of its 16 most actively traded currencies, after the Bank of England said that it may "provide further monetary stimulus" if warranted.
Jeremy Stretch, a currency strategist at Rabobank International, said that "the market doesn't need much reminding of the weak fiscal situation in the UK. The risk of more quantitative easing should weigh on sterling." The Pound depreciated over 2% versus the Dollar during the past couple of days, a trend that looks set to continue in the short-term, as we approach the lowest level since May.
Britain is selling record amounts of debt to cover the budget deficit, after the Chancellor of the Exchequer Alistair Darling introduced stimulus measures to haul the UK economy out of the longest recession on record. While the Bank of England hasn't ruled out buying more bonds to revive the economy, the Federal Reserve has raised the discount lending rate.
The Bank of England last week cuts its forecast for annual gross domestic product growth to about 3.2% for the second quarter of 2011, compared with about 4% previously. The Pound may come under further selling pressure this morning, as a report from the Office of National Statistics is expected to show that UK retail sales missed analysts' expectations in January.
Foreign Exchange Daily News - The Pound rallies against the Euro, after the EU fails to release detail of an aid package for Greece
by Adam Solomon
Sterling / Euro and US Dollar
The Pound rallied strongly against the Euro yesterday in the Foreign Exchange markets, peaking just above 1.15 in London, while the UK currency also hit a high of $1.5814 versus the Dollar, before declining later in the day. The minutes from the Bank of England's last policy setting meeting showed that the committee voted unanimously to pause on the unprecedented £200 billion bond purchasing program.
In the accompanying statement, the minutes said that "the February projections did not imply an overwhelming risk of inflation being below the target over the forecast period, and so did not suggest an immediate need for a further relaxation of the policy stance. For some member, the arguments were finely balanced."
Policy makers have to balance the strength of the economy against rising inflationary pressures, as unemployment clouds the outlook just a few months before the general election. Peter Dixon, an economist at Commerzbank AG, said the vote "was a signal that the Bank won't have to engage in any further action unless the economy tanks. I personally think there won't be any further purchases."
Inflation accelerated way beyond initial estimates in January to 3.5%, the fastest pace in 14-months and the rate's increase of more than a percentage point from the Bank of England's 2% target forced Mervyn King to write a public letter of explanation to the Chancellor Alistair Darling. The nine-member monetary policy committee were also unanimous on the decision to keep interest rates at a record low of 0.5%.
In the letter, King told Darling that "the committee expects this to be a temporary deviation of inflation from the target. The latest inflation report forecast suggests that the underlying pressures are to the downside." Policy makers are debating whether more emergency stimulus will be necessary, after the economy limped out of the recession in the fourth quarter.
Some officials argue that an increase in bond purchases could boost inflation expectations and "increase the chance of unwarranted increases in asset prices." Elsewhere, a report from the Official of National Statistics showed that UK unemployment claims unexpectedly increase in January to the highest level since 1997.
The number of people of receiving jobless benefits rose by 23,500 from the previous month to 1.64 million, the highest level since April 1997. The Bank of England said last week that employment is at risk of falling "significantly further" if the economy's recovery from the longest recession on record relapses into a recession.
George Buckley, chief UK economist at Deutsche Bank AG, said "it's a concern given that we thought the labour market was improving. Firms are faced with the possibility that the level of economic activity is lower and weaker than they thought, and that raises the possibility that they'll decide to shed jobs in the future."
The Pound was relatively unchanged against the Dollar after the release of the data, trading in the region of $1.5770, while the UK currency actually made gains versus the struggling Euro. The Pound is likely to make further gains against the Dollar, providing risk appetite holds firm. UK stocks gained for the seventh time in eight days, led by a rally in financial shares.
Analysts recommended Barclays Plc and Man Group Plc, after share prices jumped by the most in four months. Barclays Plc rose 2.9%, leading a surge in banking stocks, as the FTSE 100 Index gained 0.6% in London. The FTSE 100 index last week posted its first weekly gain in a month, after EU leaders reached an agreement on the best way to help tackle Greece's debt crisis.
Euro / US Dollar
The Dollar rose towards the highest level in nine-months against the Euro yesterday, amid signs that the U.S economy is gaining momentum, after GDP rose 5.6% in the fourth quarter. The U.S currency advanced against 14 out of the 16 most actively traded currencies yesterday, on speculation that the Federal Reserve will be one of the first major central banks to remove stimulus measures.
U.S housing starts rose in January to a higher level than initial estimates, a sign that government support has helped stabilise the property market. Builders broke ground on 591,000 homes last month at an annual rate, up 2.8% from December. The extension and expansion of a homebuyer tax credit may boost demand over the coming months.
Elsewhere, industrial production in the U.S also rose more than predicted in January, indicating that factories were leading the recovery at the beginning of the year. Output climbed 0.9%, after a 0.7% increase the previous month, as rising overseas demand and efforts to replenish inventories will help keep factory production expanding over the coming months.
According to analysts at Citigroup Inc, the Euro may give up its gains against the Dollar, after EU finance ministers failed to agree on a concrete rescue package to help Greece plug its budget deficit. Ministers in the Euro-zone said after a two-day meeting in Brussels that they wants guarantees that Greece will be able to cut spending before they offer details on an aid package.
The Euro rose as much as 1.3% on Tuesday, its biggest gain in over a week, after Greek Finance Minister George Papaconstantinou said that the government doesn't need a bailout. However, the Dollar resumed its upward momentum against the Euro, after minutes from the Fed's last policy meeting showed some officials pushed to start selling assets in the near future, as a means to shrink the bank's balance sheet.
Foreign Exchange - The Euro bounces back against the majors, after Greek Finance Minister say no need for bailout
by Adam Solomon
Sterling / Euro and US Dollar
The Pound weakened 0.5% against the Euro yesterday in the foreign exchange markets, while UK government bonds rose after the Bank of England governor Mervyn King said that a "temporary" rise in consumer price inflation will lose momentum, spurring speculation that the Central Bank won't be raising interest rates any time soon. Investors are betting that rates will stay lower for longer, as the economy limped out of recession in the third quarter and price pressure subside.
A report from the Office of National Statistics yesterday showed that UK inflation accelerated in January to the fastest pace in 14-months, as an increase in sales tax pushed the rate high enough to prompt a public letter of explanation from the BoE governor to the Chancellor Alistair Darling. Consumer prices rose 3.5% from a year earlier, the most since November 2008.
A reading deviating by more than a percentage point above the Bank's 2% target requires King to write a letter to the Chancellor explaining his plans to return the inflation rate back towards the goal. King predicted last week that the near-term increase in inflation won't last, as slack caused by the recession curbs consumer price pressures.
The Bank of England paused its £200 billion bond purchasing program earlier this month and policy makers are bracing themselves for a set of volatile data in the aftermath of the slump, at a time when the looming general election and the threat of a hung parliament clouds the economic outlook. The Pound actually advanced against the Dollar after the inflation data yesterday, as UK stocks gained for a second successive day.
Yesterday's letter from the BoE governor King is the sixth since the Bank was granted independence in setting interest rates in 1997. King said last week that the Central Bank can't control short-term price moves, as the Pound's weakness, higher commodity costs and the expiry of the VAT cut stoke inflationary pressures.
King also reiterated yesterday that policy makers may resume the quantitative easing policy if needed. Alan Clarke, an economist at BNP Paribas SA, said that "the bank is going to be aggressively sat on its hands for a while. There's more fiscal tightening to come in the aftermath of the election", as the government attempts to reduce the record budget deficit.
The benchmark FTSE 100 Index rose 0.4%, led by a rally in shares of Barclays Plc after the second largest British bank reported profit that beat analysts' initial estimates. Barclays surged 6.5% in London, after posting its first weekly advance in a month. EU leaders reached an agreement to help tackle Greece's budget deficit, reinforcing risk appetite.
The Pound fell against the Euro yesterday, after Greek Finance Minister George Papaconstantinou said that the nation is ahead of its own deficit reduction targets. He said that Greece has "no actual need" for a bailout, as investors wait patiently for the EU to provide concrete details on the extent of the bailout package.
Euro / US Dollar
The Euro bounced back against the Dollar yesterday in the currency markets and may extend gains versus the greenback in the short-term, after recording the biggest increase in seven months, amid speculation that Greece won't need a European Union bailout to meet deficit reduction targets. Vassili Serebriakov, a currency strategist at Wells Fargo & Co, said that "the currency fell substantially and it probably moved too far too fast. Risk appetites more broadly are rebounding and the Greece-related headlines aren't having much of a negative impact."
The Dollar fell 1.26% against the Euro yesterday to $1.3770, the most on a closing basis since it dropped 1.28% on July 31st. The improvement in risk appetite also meant the U.S currency lost ground against a basket of currencies, including the Pound, as the market traded through the significant resistance level at $1.6765.
The Euro has fallen 9% against the Dollar from a high of $1.5144 in November, on concern that sovereign debt problems will hamper a recovery in the Euro-region. Futures traders last week increased to a record bets that the Euro would decline against the Dollar on the basis that the decline in the single currency has been too aggressive.
Foreign Currency Exchange - The Pound rallies in anticipation of the latest inflation data
by Adam Solomon
Sterling / Euro and US Dollar
The Pound remained largely unchanged against the majors, as trading conditions were subdued due to the U.S President's Day market holiday. The UK currency consolidated just above 1.1500 versus the Euro, as EU finance ministers were expected to release the details of a rescue package to bailout Greece.
UK gilts also climbed towards the highest level in five weeks, as a private report showed that the average cost of a UK home climbed 3.2% this month, while stocks also rose, curbing demand for fixed-income assets. The benchmark FTSE 100 Index rose 0.7% yesterday to 5,177.35, extending last week's advance to 1.6%, led by British Airways Plc.
UK stocks rose for the first time in a month, after EU leaders reached an agreement on how to tackle Greece's debt crisis. The index has still fallen 6.1% from this year's high on January 19th and the Pound has subsequently declined heavily against the U.S Dollar and the Japanese Yen, as traders seek the security of low cost loans in Japan.
The Pound may gain some momentum against the ailing Euro this morning, after a report from the Office of National Statistics, which is expected to show that consumer price inflation jumped 3.5% in January, from 2.9% in December. The Bank of England have made their thought on inflation public over the past week, but the near-term increase above 3% will force the Governor Mervyn King to write a letter of explanation.
King said last week that the Bank of England can't control the short-term increases in consumer prices, as the Pound's weakness, higher commodity costs and an increase in sales tax stoke inflation. Brian Hilliard, an economist at Societe Generale SA, said that "this will be the peak. The BoE has made it abundantly clear that once you look beyond the short-term, they're predicting a very significant fall inflation. I hope they're right, but I think they're too optimistic."
In the Central Bank's quarterly inflation report last week, policy makers said that inflation will reach about 3.3% in the first quarter, before slowing as much as 0.9% and staying below the target as slack in the economy suppresses price pressures. The conclusion of a 2.5 percentage point cut in sales tax and increases in energy costs in the past year probably pushed up inflation.
The consumer price data has tended to exceed initial estimates over the past few months and today's letter from the Governor to the Chancellor will be the sixth since the bank was granted independence in setting interest rates in 1997. The Bank of England remains preoccupied that the economy, which only just exited the recession in the fourth quarter, will relapse and shrink again this year.
Elizabeth Afseth, a strategist at Evolution Securities Ltd, said that "the stronger house prices and likely increase inflation will be temporary issues. There's lots of issuance coming because of the deficit, so it could be that yields drift a little higher. That's the concern on people's minds." Rightmove Plc said yesterday that house prices jumped 5% from January, the most since records began in 2002.
Euro / US Dollar
The Euro struggled to stem the flow of losses yesterday, after the European Union's top economic official said that Greece should take more measures to cut the nation's largest budget deficit. European finance ministers were locked in discussions yesterday reviewing Greece's deficit plan under pressure from investors to spell out concrete action on the rescue package.
Greece's deficit is currently at 12.7% of gross domestic product and the Prime Minister George Papandreou has pledged to slash the shortfall to the EU limit of 3% by 2012. Jean-Claude Juncker, who is head of the group of euro-area finance chiefs said yesterday that ministers need reassurace that Greece can reach the target.
The Euro also came under additional selling pressure during the President's Day market holiday in the U.S, after ECB governing council member Athanasios Orphanides said that the central bank will continue to support the economy, even as it unwinds its emergency lending measures, suggesting that interest rates may remain at a record low for some time to come.
According to analysts at Societe Generale SA, the Euro may fall by 1.6% against the Dollar in the near-term before gaining traction later in the year. The single currency has lost 5.2% against the Dollar and may drop to $1.3485 initially or to the lower end at $1.3390. Fibonacci retracement levels refer to a series of numbers known as the Fibonacci sequence that is used by analysts to identify key support and resistance levels.
Data Released 16th February
U.K 09:30 - DCLG House Prices (December)
U.K 09:30 - Consumer Price Index (January) - Retail Price Index
EU - Ecofin Meeting
GER 10:00 - ZEW Index (February)
U.S 13:30 - Empire State NY Fed Manufacturing (February)
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