GBP/USD GBP/EUR
The Pound attempted a limited recovery in early trading yesterday, with suspicions that selling from the previous day had been over-exaggerated, following the poorly-received gilt auction on Wednesday. However, the UK currency extended its losses against the Dollar yesterday, after a government report showed that retail sales plunged in February by more than four times faster than anticipated.
The report from the Office of National Statistics showed that sales dipped 1.9% from the previous month, the single biggest monthly decline since June, as unemployment rose and the recession deepened. Economists had predicted a 0.4% decline and sales increased just 0.4% from a year earlier, the smallest since September 1995.
The Chief Executive of Next Plc Simon Wolfson said yesterday that current trading conditions are “tough”, after the UK’s second biggest retailer reported a 15% drop in full-year profit. The deteriorating labour market conditions are expected to exacerbate the decline in consumer spending, while the bank’s refusal to revive lending conditions will continue to weigh on sales.
Earlier reports this week showed that UK inflation unexpectedly accelerated to 3.2% in February, driven by the cost of imports, and the Pound subsequently rallied, amid speculation that the increase in consumer prices will limit the risk of deflation.
Nevertheless, the Governor of the Bank of England Mervyn King said in an open letter to the government that the inflation rate will resume its drop from a high of 5.2% in September. The Bank has forecasted that the rate will slip towards 0.3% by early 2011, significantly below the bank’s 2.0% target.
King said this week that the UK economy fell deeper into a recession at the start of year, after the biggest contraction since 1980. The Central Bank has embarked on an asset insurance program to spend up to £150 billion to buy UK government debt, corporate bonds and other toxic assets with newly created money.
The Pound fell 0.4% against the Dollar in London, amid a combination of poor economic data and a third consecutive fall in the UK stock market. Sterling has continued that momentum this morning, falling to a low of $1.4320, as the data and downside moves in the stock market encourages investors to seek the security of dollar denominated assets.
The UK currency also slumped against the Euro, following the retail data, after earlier rising amid optimism that the worst of the financial turmoil may be over. The Debt Management Office, which manages bond auctions on behalf of the Treasury, sold £1.1 billion of inflation-linked bonds due 2022, with bids exceeding supply by 2.72 times.
The government amid to sell a record £146.4 billion of debt this fiscal year and roughly £148 billion in 2010, as the Prime Minister attempts to wrestle the UK economy out of its worst recession in a generation. The Chancellor Alistair Darling has signaled that he may refrain from holding a second round of fiscal stimulus measures in April 22nd budget, saying that “a substantial amount of money has gone into the economy.”
Gordon Brown is currently in the U.S, calling on the Group of 20 nations to raise $100 billion for a fund, aimed at providing guarantees for trade finance. The measure is designed to make up for the lack of bank lending, with world trade expected to decline at its fastest pace in 80-years.
The Pound may continue to struggle against the majors today but a narrow current account deficit should provide some relief. The UK currency may be unsettled by policy uncertainty, with particular concerns over the budget outlook as debt continues to expand at a rapid pace.
EUR/USD
The Euro pushed back above $1.3600 versus the Dollar yesterday, but the single currency was unable to sustain a move towards the resistance at $1.3650, as European stocks swung between gains and losses. The U.S economic data was close to initial estimates and failed to have any major effect of the exchange rate.
The latest estimates of U.S gross domestic product in the fourth quarter showed that the economy contracted at a rate of 6.3% in the three months to December, the worst performance since 1982. The reports indicates the depths of the recession, while a separate report from the Labour Department showed that the number of people claiming jobless benefits this month climbed to a record 5.56 million.
Data Released 27th March
U.K 09:30 Current Account (Q4)
U.K 09:30 Final Gross Domestic Product (Q4)
EU 10:00 Industrial Orders (January)
U.S 12:30 Personal Income / Consumption (February)
U.S 13:55 Michigan Sentiment (March Final)
written by Adam Solomon
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