GBPEUR/GBPUSD
The Pound declined against the Dollar yesterday, falling back towards the key support level around $1.6200, as a report from Rightmove Plc showed that UK home sellers lowered their asking prices in June for the first time in five months. Stock market losses sapped demand for riskier assets priced in Sterling and that eroded confidence in the Pound throughout the course of the day.
According to the report, the average cost of a home in Britain dropped 0.4% to £226,436 from May, when it rose by 2.4%, as banks scaled back lending and demanded bigger deposits on purchases. In a separate report from the Centre for Economics and Business Research, services companies will lose more than 300,000 jobs within the next five years, adding to the already escalating unemployment problem.
The Bank of England have recently said that the UK housing market is showing tentative signs of stabilising. However, the governor Mervyn King said last week that tighter lending conditions may hamper an economic recovery from the worst recession in a generation. Unemployment, which rose to the highest level since 1996 in the quarter through April, may also hamper a rebound in property values.
Miles Shipside, commercial director at Rightmove Plc, said in an interview yesterday that “we’re very much bumping along the bottom. Sellers are having to reduce prices to where they’re getting interest, with the pickup in sales activity, there’s a narrowing gap between asking prices and what’s actually being achieved.”
UK house prices fell 5.5% on the year, as mortgage lenders raise the cost of fixed-rate loans and require bigger deposits. The Nationwide Building Society and Lloyds Banking Group Plc this month both increased the cost of their fixed-rate home loans, after a jump in UK swap rates, used by banks as a benchmark for mortgage costs.
The drop in house prices this month follows separate reports last week that showed UK retail sales unexpectedly fell in May, while unemployment increased to the highest level in 12-years. The Pound dropped in light of the damaging economic data and also registered losses, after manufacturers’ export orders declined to lowest level in a decade, reflect the lack of demand from overseas.
Nevertheless, there are still signs of a pick-up in the economy as more than half of UK companies said that the country has reached the bottom of the economic cycle and business confidence rose to the highest level since 2008. Inflation also slowed less than economists’ forecasts in May, while both manufacturing and service industries also improved.
The Pound also weakened against the Japanese Yen and Swiss Franc, as a degree of risk aversion stalked the market. However, the UK currency rallied to the highest level against the Euro this year in London, touching a high of 1.1900, before retracing back towards the trend support at 1.1764 this morning.
UK stocks also dropped for the first time in three days yesterday, to the lowest level since April, as a retreat in crude oil prices weighed on producers. Concerns also grew that the overwhelming rally since March has outpaced expectations for the earnings and the economy. The benchmark FTSE 100 Index of UK shares slid 2.6% on the day, while the MSCI world index of equities also declined.
Daragh Maher, deputy head of global foreign-exchange strategy at Calyon, said that “equity markets have been a bit softer and we have been a modest safe haven bid back. This is favouring the Dollar over Sterling.” The Pound has risen 2.6% against the Dollar over the past month but the UK currency dropped to a low of $1.6250 overnight, after briefly touching a high of $1.6500 yesterday.
Government bonds rose around the globe, while stocks fell, as the World Bank said that the global economy will contract 2.9% this year, up from a previous forecast of 1.7%. The Confederation of British Industry said earlier this month that the UK economy will shrink 0.3% in the second quarter and 0.1% in the third.
The Pound’s performance is almost solely down to the aggressive swings in risk appetite and we can expect to see further downside momentum, particularly against the lower-yielding currencies, if stock market losses worsen. Euro and Dollar buyers may wish to take advantage of the current rate or at least place a stop order in the market to protect against further losses. A good level for stop on Sterling/Dollar would be just under the pivotal $1.6200 level and 1.1600 versus the Euro.
EUR/USD
The Euro dipped to lows around $1.3825 against the Dollar yesterday, as commodity prices continued to decline before a modest stabilisation in New York. The German Ifo sentiment index rose to a reading of 85.9 in June, compared with 84.2 the previous month, maintaining the improvement over the past few months.
Companies were still largely pessimistic over current economic conditions and Ifo officials did not describe the modest improvement as a defining turning point for the economy. That cautious tone of the comment tended to stifle any resurrection in risk appetite and maintained doubts over the prospects for an economic recovery in the Euro-zone.
The Dollar was supported as investors returned to the relative security of safe haven assets, as the World Bank released its latest forecasts for the global economy and was generally downbeat on the chances of a recovery. The U.S currency may continue to may gains in an environment of risk aversion but Wednesday’s Federal Reserve interest rate announcement will be watched closely, amid high uncertainty over the Fed’s guidance on the economy.
According to technical analysts at Citigroup Inc, the Euro will probably extend its decline against the Dollar, as it approaches a major areas of support. The single currency dropped by the most in a week yesterday and the Euro is forming a “head and shoulders” formation, indicating further depreciation if we break through level between $1.3793 and $1.3722.
Data Released 23rd June
EU 08:58 Flash PMI – Composite (June)
– Manufacturing
– Services
U.S 15:00 Existing Home Slaes (May)
written by Adam Solomon
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