GBP/USD GBP/EUR
The Pound was unable to make any headway during Asian trading on Monday and slumped to the lowest level in six weeks against the U.S Dollar. The UK currency also suffered a sharp intraday loss against a basket of currencies, as banking shares tumbled and a report from the Confederation of British Industry predicted that the economy will contract by more than initially anticipated.
The Chancellor of the Exchequer Alistair Darling has been advised to hold back on any further fiscal support to the economy and allow time for the current measures to take effect. Government debt has also increased exponentially and the report from the CBI forecasted that the UK economy will shrink by 3.9% this year.
The extent of the economic slump will exacerbate the Treasury’s deficit, curb tax revenue and push the deficit to 11.2% of gross domestic product. That may limit the amount of new spending that Darling can announce in the annual budget statement on Wednesday, which the government hopes will bolster the economy and increase support ahead of the election due by the middle of 2010.
The accompanying statement from the CBI Director General Richard Lambert said that “given falling tax revenues, the shrinking economy and alarming levels of debt, we urge the chancellor to avoid any further major fiscal boosts.” The suggestions from the business lobby contrast with the view of union representatives, who want the government to spend more on bailing out struggling automakers like General Motors Corp.
The political pressures surrounding the tone of the budget statement will be significant, as Darling must appeal to the electorate and convey a plan to boost the labour market. The unemployment rate has risen to the highest level since 1971, as companies cut output and shed workforces. A separate report from the Centre for Economics and Business Research said yesterday that fewer jobs will be lost in the financial services industry than previously estimated.
Roughly 29,000 jobs will be eliminated, compared with an October estimate of 34,000, while 28,000 lost their pensions last year. Nevertheless, the CBI and the CEBR both agree that the worst of the recession may be over, after a gauge of UK service sector growth rose to a six month high in March. In addition, a report from the Bank of England showed that mortgage approvals rose in February, while house prices increased for the first time since 2007.
The Pound was unable to sustain the recent upside momentum against the Euro yesterday, falling towards 1.1220 last night, despite a report from Rightmove Plc, which showed that asking prices for homes rose for a third month in April. Mortgage availability improved as banks revived lending, after the government injected hundreds of billions of pounds of support to banks, including Lloyds Plc and Royal Bank of Scotland Group Plc.
The Bank of England have cut interest rates to a record low of 0.5% and embarked on a program of creating new money to purchase government and corporate bonds in a policy known as quantitative easing. The aggressive policy easing from the BoE has put the UK ahead of the curve in terms of an economy recovery and that has seen the Pound rally to a high of 1.1368 versus the Euro.
The Pound also registered losses against the Japanese Yen and Swiss Franc, as an element of risk aversion crept back into the market, after the FTSE 350 Banks Index dropped 5.3% in London. UK stocks also slipped 2.5% yesterday, falling below the 4,000 barrier, amid speculation that the economy is still in the midst of the worst recession since 1980.
The Pound slipped to a low of $1.4501, to record the biggest daily decline since March 9th and the lowest level since April 2nd. The aggressive swings in risk sentiment and fiscal policy uncertainties will continue to be the dominant feature this week. The annual budget tomorrow is expected to have a tough tone on government spending, while trends in the global banking sector will be watched closely.
Ongoing fears surrounding the U.S sector will undermine confidence in the Pound and the degree of risk appetite will also remain very important in driving sentiment. The UK currency may find some support just under the $1.4500 level versus the Dollar and has already staged a partial correction this morning, following the sharp losses on Monday.
EUR/USD
The Dollar rallied to close to a five-week high against the Euro yesterday, amid concerns that the global financial crisis will worsen and boosted the demand for the U.S currency as a safe haven. The tentative sentiment surrounding the prospects of an economy recovery continues to drive the market and the Dollar may continue to make gains in the short-term, breaching the $1.3000 level.
The Japanese Yen also strengthened against 15 out of the 16 most actively traded currencies, as the slump in Asian stocks prompted investors to reduce holding of higher-yielding assets. Yuji Saito, head of foreign-exchange group in Tokyo at Societe Generale SA said that “renewed worries over the financial turmoil are making investors risk averse again. In this environment, the dollar and the Yen are likely to be bought as ‘safe haven’ currencies”.
The Euro also came under further selling pressure, after the ECB chairman Jean-Claude Trichet signaled that the governing council will cut interest rates further from the current 1.25% and may pump money into the economy in a less conventional policy measure. Overall confidence in the Euro-zone economy also remained weaker, which curbed support for the single currency.
Data Released 21st April
U.K 09:30 Consumer Price Index (March)
– Retail Price Index
GER 10:00 ZEW Index (April)
written by Adam Solomon
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