GBP/USD GBP/EUR
The Pound was on the defensive against the majors yesterday, amid a combination of economic and market fears, with lows around 1.0670 versus the Euro. While the UK currency also recorded net losses to around $1.4550 against the Dollar after the FTSE 100 Index dropped, as HSBC Holdings Plc said that will cut about 1,200 jobs in the UK, adding to signs that the recession is deepening.
The deteriorating labour market conditions has been a source of concern for the government, after Europe’s largest bank by market value, said that it will eliminate the jobs over the next 12-months in processing and operations, while some administration sites may be closed altogether.
The Pound also retreated from close to the highest level since December against the Japanese Yen, as a degree of risk aversion crept back into the market and encouraged investors to seek the security of safe haven currencies. The FTSE 100 Index of equities fell for a second day and the cost of protecting European corporate bonds from default rose.
The Pound declined up to 0.7% versus the U.S Dollar and extended losses against the Euro, after a report from the Confederation of British Industry showed that UK retail sales dropped in March. The survey showed a net 44% lower sales this month, as lending conditions remained restrained.
The UK CBI retail sales survey was weaker than anticipated and the report will provide an insight into the monthly retail sales data this morning and the data has been consistently stronger than expected over the past month.
The Bank of England have embarked on the post aggressive policy easing in its history, in an attempt to get banks lending again, lowering the benchmark lending rate to just 0.5%, from 5% in October. The Treasury has also granted the Central Bank the unprecedented power to create money and pump it into the economy through the purchase of government and corporate bonds.
Policy makers have been given the mandate to spend up to £150 billion, as part of it’s asset insurance program, in a bid to boost spending and end the worst recession in a generation. The governor of the BoE Mervyn King told lawmakers in Parliament yesterday that the “very weak” UK economy will continue to contract this quarter.
The Bank of England stepped up quantitative easing yesterday and bought £85.5 billion of corporate bonds in its first purchase of the debt. The Central Bank said in a statement that it had offered to buy as much as £124 million of debt and plans to hold another tender today for a maximum £128 million in company bonds.
The acquisition of company bonds follows the Bank of England’s purchases of commercial paper and government debt. The Bank will spend as much as £75 billion in newly created money within the next three months to boost the ailing economy. Elsewhere, a separate report showed that the UK bond auction failed to find enough buyers for £1.75 billion of bonds for the first time since 2002.
Gilts plunged after the Debt Management Office, which manages bond auctions of behalf of the Treasury, said that investors only bid for £1.63 billion of the 40-year securities. The last time the UK government was unable to attract enough investors was in 2002 when it tried to sell 30-year inflation-protected bonds.
The Pound will be at greater risk to selling pressure today if the retail sales report is significantly weaker than expected but the UK currency may also be susceptible to downside pressures, amid increased fears that the UK will not be able to attract sufficient overseas interest for bonds.
EUR/USD
The Euro weakened to lows around $1.3420 versus the Dollar yesterday, before rising sharply towards the close of trading last night, amid comments from China over the possibility of greater use of an alternative reserve currency. The issues of reserve currencies and exchange rate management were again important influences and the U.S Treasury Secretary Timothy Geithner stated that the administration was open to the idea.
Geithner’s comments initially weakened the Dollar but he retracted his remark, saying that the Dollar would remain the dominant reserve currency. The greenback will be sensitive to any further suggestion of reserve diversification, while evidence of a U.S economic improvement would lessen the risk that confidence in the Dollar would deteriorate.
The Euro initially declined against the Pound yesterday, after German business confidence fell to the lowest level in over 26-years in March. The report adds to signs that the recession is worsening and has heaped further pressure on the ECB to implement less conventional monetary tools. The Ifo Institute in Munich said its business climate index dropped to a reading of 82.1 from 82.6 in February, the worst reading since November 1982.
The global slump in overseas demand has forced German companies to scale back production and cut jobs, pushing the economy into the worst recession since the Second World War. The European Central Bank has signaled that it will cut interest rates again in April, but a number of policy makers have expressed reluctance to follow the Federal Reserve and Bank of England in engaging in quantitative easing measures.
Data Released 26th March
U.K 09:30 Retail Sales (February)
EU 09:00 M3 / 3 Month Moving Average (February)
U.S 12:30 Gross Domestic Product (Final Q4)
U.S 12:30 Initial Jobless Claims (w/e 21st March)
written by Adam Solomon
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