GBPEUR/GBPUSD
Following on from last week, the Pound found support around $1.4450 against the Dollar on Thursday, while the UK currency also lost ground against the majority of the 16-most actively traded currencies. Investors flocked to the security of safe haven assets like the Japanese Yen and Swiss Franc, after Moody’s Investors Service said that the nation’s finances are “deteriorating rapidly” and the economy shrank by the most since 1979.
The degree of risk aversion sweeping through the market saw the Yen rally to a three week high against the Dollar, as Asian stocks fell and U.S equity futures headed lower. Adam Cole, head of global foreign-exchange strategy at RBC Capital Markets in London, said that “weak data and concerns about budget conditions leading to ratings downgrades are putting pressure on the Pound.”
The Pound rebounded from the 38.2% retracement level at $1.4450, to a high of $1.4722 in New York. However the UK currency has continued the downside momentum against the Euro, falling to a low of 1.1023 during the Asian session. The Nikkei 225 stock average fell 1.6% over night, amid speculation that the global recession will continue to delay a recovery in the world economy.
The Chancellor of the Exchequer Alistair Darling delivered his annual budget last Wednesday and the Pound declined following the statement, which seemed to indicate an overly optimistic view that the economy would recover at the end of the year. The UK government’s balance sheet is worsening due to weakening tax revenues and the effect of its bank bailouts.
Moody’s and Standard & Poor’s are currently reviewing the UK’s AAA sovereign credit rating, after the government said that the nation’s debt will reach £1.4 trillion over the next five years. An article in the Daily Telegraph said that Moody’s analysts are scrutinising the details of the budget and said that the Treasury’s projections are “a cause for concern.”
Sean Callow, senior currency strategist at Westpac Banking Corp said that “its a veiled threat from Moody’s. Given that we are still above where we were 24-hours ago you would hardly be shocked if the Pound headed back to the low 1.45s against the Dollar.”
The tone of the article is weighing on the Pound, particularly against the Euro, as the financial turmoil fueled borrowing costs and swelled the budget deficit to a record level. The UK currency is under considerable pressure against the single currency and may fall below 1.1000 over the coming weeks. The Pound depreciated 1.1% against the Euro on Friday, after touching the weakest level since April 9th.
The UK economy shrank 1.9% in the first quarter, the biggest contraction since Margaret Thatcher came to power in 1979. Gross domestic product fell 1.6% in the previous three months, indicating that the recession is showing few signs of abating, after manufacturing and service industries recorded sharp declines.
The economic slump may turn out to be the worst recession since the 1930s, prompting the government to say last week that the budget deficit could swell to a record level, casting doubt on the nation’s credit rating. The Bank of England argues that the slump in the economy may be easing, as they print money to stave off the threat of deflation and keep interest rates at a record low.
The Pound lost 26% versus the Dollar and 12% against the Euro over the past year and the weekly dollar-pound exchange rate has averaged about $1.67 over the past 20-years. That’s 14% higher than the current price, leading some analysts to conclude Sterling is undervalued.
Roddy Macpherson, an investment director at Scottish Widows Investment Partnership Ltd, said “we think the Pound will be the strongest currency over the next 12-months. The recovery of the UK economy will take place in the first half of next year, and the central bank will start to tighten” monetary policy.
In terms of economic data, the Pound may find some respite this week, following the negative market reaction to Darling’s budget and plans to dramatically increase public sector borrowing. The CBI distributive trades survey for April, along with consumer confidence data and manufacturing reports for the same month are all expected to show a modest improvement.
EUR/USD
The U.S Dollar and Japanese Yen have gained ground against the majors over the weekend, as concerns returned to global financial markets, regarding the spread of swine flu that has already killed 103 people in Mexico. Stocks declined around the world, Treasuries gains and safe haven currencies benefited, as the swine flu outbreak also spread to the U.S and Canada.
The U.S government declared a “public health emergency of international concern” that could potentially become a global outbreak of serious disease. The Dollar gained almost 1% against the Pound and the Euro overnight, as concern about the global epidemic became more intense. The subsequent degree of risk aversion also saw risk sensitive currencies like the Australian and New Zealand Dollar decline, with further selling pressure anticipated throughout the course of the day.
Concerns over a global pandemic will continue to overshadow markets for the time being, with the safe haven currencies benefiting the most. In terms of economic data, the focus this week will fall on the advanced estimates of U.S gross domestic product in the first quarter. The report is expected to show that the economy is contracting at an annual rate of 5%.
Elsewhere, the Federal Reserve’s Open Market Committee are set to convene this week and with interest rates already at ultra low levels, its thoughts will be on the U.S economy. There is also plenty of market moving data in the Euro-zone, with a host of key data due for release. The EC activity indices are expected to remain at depressed levels, while the flash estimate of consumer prices may show that inflationary pressures have subsided.
Data Released 27th April
U.K 00:01 Hometrack House Prices (April)
written by Adam Solomon
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