GBPEUR/GBPUSD
The Pound fell to the lowest level in six months against the Euro yesterday, dropping towards 1.0750 early in Europe, before a partial correction higher later in the day. The UK currency also dropped well below $1.60 versus the Dollar, consolidating its decline from last week, to the lowest level since July 8th at $1.5770.
The Pound is likely to test the next significant support level at 1.0526 versus the Euro over the coming weeks, amid speculation that the Bank of England is actively trying to weaken the currency, in order to help revive the UK economy. The Governor Mervyn King was quoted in the Newcastle Journal as saying that the Pound’s weakness was “helpful”.
According to the minutes released last week, BoE policy makers have said that there may be “false dawns” in the economic recovery and there is a growing concern over the financial position in the UK. Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi, said that “added to the negative Pound sentiment were the comments from King that the bank favours the weaker Pound, as a means to rebalance the economy.”
The Pound has weakened to the lowest level since April 1st and may continue to decline based on a form of technical analysis known as the Fibonacci sequence of numbers. The Monetary Policy Committee was unanimous in their decision to leave its asset purchase program on hold at £175 billion, but the Pound would need to break above 1.1270 versus the Euro to change the trend towards the upside.
The Bank of England embarked on the controversial quantitative easing policy in March, in an effort to reduce borrowing costs and kick start the economy that has been ravaged by the worst recession since the Second World War. King, who was outvoted in August for a bigger increase in the plan, was quoted as saying that “the banking sector is not in good shape and it will take a long time before the balance sheets of the banks are fully repaired.”
The minutes from the September policy meeting also showed that King changed his stance from the August announcement and elected for a no change in the plan. Lutz Karpowitz, a currency strategist at Commerzbank AG, said that “a currency which the country’s own central bank likes 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.”
At the G-20 meeting last week, finance ministers around the world signaled that the economic recovery may not be robust enough to justify the withdrawal of fiscal stimulus measures. The Federal Reserve said on September 23rd that it has pushed back the end date of its asset purchase program to March from December and kept the benchmark interest rate at a record low.
Bank of England policy maker Kate Barker said on the same day that that a hurried increase in borrowing costs could deter banks from lending and hamper the economic revival. According to analysts at BNP Paribas SA, the Pound may fall towards $1.54 by the end of the year, should the Bank of England maintain the current stance on the currency’s decline.
Ian Stannard, a currency analyst at BNP Paribas SA, wrote in a report last week that “the Bank of England appears unconcerned by the currency weakness at this stage. We maintain our bearish sterling view, expecting the currency to be the weakest among the majors.” Sterling has lost 7% in value against the Euro since mid June, after climbing 12% in the first half of the year.
BNP Paribas SA said last week that the Pound may reach parity with the Euro in the first quarter of 2010. Elsewhere, Citigroup Inc said on Friday that the UK currency may fall to the lowest level against the Norwegian Krone since 1977. In stark contrast, Goldman Sachs Group Inc said on September 22nd that investors should sell the Euro versus the Pound at 1.10.
In terms of economic data, the Pound failed to secure buying support yesterday, after UK house prices increased by the most in two years during September. Confidence in the UK property market improved and the average cost of a home in Britain rose 0.2% to £156,100. The increase is the biggest since June 2007 and has left house prices 5.6% lower than a year earlier.
The report adds to recent evidence that the property market may be starting to recover, after the credit crunch ended a decade long boom. There is still a risk that the recovery will falter, as unemployment continues to rise, while the fundamental lack of properties for sale on the market has also contributed to a rise in prices.
The Pound may find some support against the majors this morning with the final estimate of UK gross domestic product in the second quarter due for release. The report will probably confirm that growth remained unchanged from the preliminary estimate earlier in the year.
Elsewhere, UK mortgage application are expected to increase to 52,000 in August, indicating a return to growth in the third quarter. However, while the data appears to be in keeping with the theme of recovery, the Pound looks set to remain under pressure versus the Dollar and the Euro.
EUR/USD
The Dollar consolidated on recent gains made against the Euro on Monday, recording a high of $1.4597 in New York, despite the fundamental lack of U.S economic data to guide financial markets. The G-20 meetings towards the end of last week did not have a significant market impact on sentiment surrounding the currency marker.
The preliminary estimates of German consumer price inflation was slightly weaker-than-expected, with a 0.4% decline for September. The subdued prices data will maintain pressure for the ECB to maintain the current stimulus measures and that will undermine support for the Euro to some extent. Global risk appetite gradually improved through the course of the day with stocks rallying in Europe and the U.S, curbing further demand for the Dollar on defensive grounds.
The Euro was able to resist a further move lower, after the ECB President Jean-Claude Trichet stated that there was a gradual economic recovery, but that it was not yet time for an exit of the ultra loose monetary policies. Trichet was addressing the European Parliament and also said that it was very important to have a strong Dollar, which will reinforce speculation that officials are looking to contain the rate of losses on the U.S currency.
Data Released 29th September
U.K 09:30 Final GDP (Q2)
U.K 09:30 Mortgage Applications (August)
U.K 11:00 CBI Distributive Trades Balance (September)
EU 10:00 Business Climate (September)
EU 10:00 Economic Sentiment (September)
– Consumer/Industrial/Services
U.S 14:00 Case Shiller House Prices (July)
U.S 15:00 Consumer Confidence (September)
written by Adam Solomon
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