GBPEUR/GBPUSD
The Pound declined heavily against the Euro yesterday, dropping to a low of 1.0940, the lowest level in more than five months, while the UK currency also dropped towards $1.60 versus the U.S Dollar. A report indicated that the Bank of England may using the Pound’s weakness as a way to boost the economy.
The Governor of the Central Bank Mervyn King also made a statement, following speculation that the BoE will cut the rate it pays financial institutions on deposits. King said that the weakening Pound was “helpful” to the process of rebalancing the economy. The Prime Minister Gordon Brown declined to comment on the Pound’s decline, although he told reporters that he welcomes “all the factors that make for a stable economy”.
The Pound has declined nearly 7% against the Euro since June and appears to have been driven lower by the tone and language used in a number of statements from Bank of England policy makers. King also said in an interview yesterday that two British banks got within hours of a liquidity shortfall on October 6th 2008, the day the financial system came to the brink of meltdown.
In a broadcast with the BBC, King said that “two of our major banks which had had difficulty in obtaining funding could raise money for one week then only for one day, and then on that Monday and Tuesday it was not possible even for those two banks really to be confident they could get to the end of the day.”
King would have been referring to Royal Bank of Scotland Plc and HBOS Plc, who were both taken under government control. The Prime Minister pledged to invest about £50 billion into the banking system on October 8th last year, to save it from collapse in the aftermath of Lehman Brothers Holdings Inc’s bankruptcy in September.
Lutz Karpowitz, a currency analyst at Commerzbank, wrote in a report yesterday that “a currency, (the Pound) which the country’s own central bank like to see weak, obviously is not an attractive investment. If King keeps digging then he is clearly signaling that he does not care about this loss of trust.”
The Pound fell 1.5% against the Euro yesterday, the weakest level since April 3rd, and is likely to fall further, after breaking through long-term trend support at 1.1270 earlier this month. The UK currency also fell after the Daily Telegraph reported that two policy makers called economists to a “crisis meeting” next week to discuss the Pound’s decline and the Bank’s quantitative easing policy.
Jeremy Stretch, a senior currency strategist at Rabobank International, said that “the press reports regarding the economists’ meeting next week could be indicating that issues such as the deposit rate cut are back on the table. The market is putting two and two together and seeing the plumbing or the pipes of the UK financial system are still a little gummed up.”
King told the UK Treasury select committee last week that policy makers were considering cutting the rate paid to financial institutions on deposits, which is currently at 0.5%. The Bank of England may still loosen its policy stance further and begin with withdrawing excess liquidity from the UK financial system in the third quarter of 2010.
Brian Kim, a currency strategist at UBS AG, said yesterday that “our economists continue to expect a £25 billion increase as part of a phased easing in the quantitative easing program. The committee in our view believes the risks to policy makers are very much asymmetric and will therefore remain in a ‘give-growth-a-chance’ mode.”
Elsewhere, the Pound also lost ground against the Dollar and plummeted to a fresh 12-year low versus the Australian Dollar, after UK stocks declined for a second successive day in London. Reports in the U.S showed that existing home sales unexpectedly fell in August, while the Federal Reserve said that it will cut the size of two programs designed to bolster credit markets.
According to the latest estimates from Commerzbank AG, the Pound may weaken to 1.0630 versus the Euro by the end of the year, after King’s comments increased speculation that the BoE is actively trying to weaken the Pound. The UK currency may fall further today, especially if global stocks continue to fall, with a breach below $1.60 versus the Dollar a possibility.
EUR/USD
The Dollar advanced against the Euro yesterday for the second day in succession, after an unexpected drop in U.S existing home sales reduced demand for higher-yielding assets, as investors maintained an mood of caution. Purchases dropped 2.7% to a 5.1 million annual rate, the second highest level in the last 23-months.
The rising unemployment rate means that more Americans may lose their homes, swelling the amount of unsold properties saturating the market. Nevertheless, the housing recession that crippled the economy is easing, as foreclosure-driven price declines, tax credits and near record low borrowing costs have helped stabilise demand over recent months.
The Dollar gained a further 0.2% against the Euro in New York, rallying to a high of $1.4713, and the U.S currency may continue to strengthen in the near-time, as global stocks decline following the FOMC announcement on Tuesday. The Fed said that it will extend the end date of its $1.45 trillion purchases of mortgage backed securities to March from December.
The Euro was largely susceptible to risk sentiment and failed to secure buying support, even after German business confidence rose to a 12-month high in September. The Ifo index indicated that Europe’s largest economy will gather momentum over the coming months, after suffering the worst recession since the Second World War.
Data Released 25th September
EU 09:00 M3 (August)
– 3 Month Moving Average
U.S 13:30 Durable Goods (August)
U.S 14:55 Michigan Sentiment (Sept – Final)
U.S 15:00 New Home Sales (August)
written by Adam Solomon
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