GBPEUR/GBPUSD
The Pound declined against the Euro yesterday, ending a two-day advance, while the UK currency also found strong support around $1.5850 versus the U.S Dollar, after outgoing Bank of England policy maker David Blanchflower said that he doubted whether the UK economy would grow this year or next. Blachflower’s pessimistic outlook for the economy has poured scorn on suggestions that we’re through the worst of the recession.
Jeremy Stretch, a senior currency strategist at Rabobank International in London, said that “we’d moved too far forward pricing in a recovery story. We’re having a bit of a reality check.” The Pound also slumped against the majority of the major currencies, after an industry report showed that UK retail sales fell in May, another sign that the recession may not be easing.
A survey of retailers showed a net 17% reported dropping sales this month, compared with just 3% saying that sales rose in April. UK retail sales deteriorated in May and next month will remain “difficult” for stores, as unemployment continues to rise and lending conditions remained constrained. The report from the Confederation of British Industry said that “conditions were tough again in May for retailers, proving April’s better sales figure was a temporary blip.”
The UK government has predicted that the economy will endure its worst recession since the Second World War this year, as companies slashed jobs and cut production. Tesco Plc, the UK’s biggest retailer, had the outlook on its A3 credit rating changed to “negative” from “stable” by Moody’s Investors Service yesterday.
UK consumer spending has declined by the most since 1980 in the first quarter, as the rising jobless rate and escalating housing slump restrains sentiment. The report from the CBI yesterday has signaled that at least the pace of the decline in sales is slowing and companies were also the most positive about the business climate since November 2007.
The Pound weakened to 1.1430 against the Euro yesterday, after a reaching a high of 1.1544 on Wednesday. The benchmark FTSE 100 Index advanced for the first time in three days, despite Blanchflower’s comments that the UK the economy faces “many false downs.” The Pound was little changed against the Dollar, consolidating back towards $1.5947, after rallying to the strongest level since November 5th.
The UK economy is expected to contract 4.1% this year and the International Monetary Fund said on May 20th that the government should reduce borrowing and retrain spending. The Chancellor of the Exchequer Alistair Darling predicted a decline of as much as 3.5% in his annual budget statement on April 22nd.
The Pound also weakened yesterday after the UK business secretary Peter Mandelson said that the protracted bankruptcy of General Motors Corp will lead to substantial job losses at its Vauxhall unit in Britain. The UK currency has advanced 4.4% against the Dollar in the past two weeks and was due a correction, according to the 14-day relative strength index.
The gauge of technical analysis that traders use to predict currency moments was at 73.35 yesterday, from 74,81 the previous day. The Pound will continue to gain protection from a lack of attractive alternatives, especially if there are renewed fears over the Euro-zone bond markets. The UK currency is edging back towards the resistance at $1.6000 against the Dollar this morning, after Nationwide reported a 1.2% increase in house prices for May.
EUR/USD
The Euro failed to break a key resistance level against the Dollar yesterday, despite reports that German unemployment rose by less than expected in May. The number of people out of work increased to a seasonally adjusted 1,000 to 3.46 million, slightly less than initial forecasts. The jobless count was pushed down by as much as 20,000 because of the law that forces the agency to alter the way it counts the nation’s unemployed.
The unemployment rate in Europe’s largest economy may shrink 6% this year, as the government spends roughly €82 billion to fight the impact of the global credit crisis. Elsewhere, the Euro-zone business and consumer confidence data was slightly weaker-than-anticipated, which dampened the mood of optimism following the labour market numbers.
European confidence in the economic outlook rose to a six-month high, adding to signs that record low interest rates and government spending plans are beginning to pull the economy out of the worst recession since the Second World War. An index of business and consumer sentiment in the 16 nations sharing Euro increased to a reading of 69.3, from 67.2 in April.
Although the overall result of the data was slightly weaker than expected, the May reading was the highest since November, while consumers’ price expectations, which turned negative for the first time on record last month, fell to the lowest level since at least 1990. There is mounting evidence that the worst of the financial crisis may be over, as manufacturing and service industry improve and global stock stand close to the highest level in six months.
Elsewhere, retail sales declined at a faster pace in May as rising unemployment prompted consumers to hold back spending. The Euro was higher against the Dollar after the confidence report and the U.S currency came under further selling pressure, after U.S jobless claims declined to 623,000 last week. In addition, the new home sales data was slightly weaker than predicted with sales almost unchanged at an annual rate of 352,000 for April.
Data Released 29th May
U.K 00:01 GFK Consumer Confidence (May)
EU 09:00 M3 / 3 Month Moving Average (April)
EU 10:00 Harmonised Consumer Prices (Flash May)
EU 10:00 Unemployment (April)
U.S 13:30 Gross Domestic Product (Revised Q1)
U.S 14:45 Chicago PMI (May)
U.S 14:55 Michigan Sentiment (May Final)
written by Adam Solomon
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