The Pound bounced back against the Euro yesterday while the UK currency also held on to the recent gains made versus the Dollar amid concerns that the U.S government’s plan to buy $700 billion in bad debt will fail to bolster the global economy.
UK stocks plummeted, led by banks, as the FTSE 100 Index fell 1.9% from the previous day’s close but the Euro bounced back above 1.2600 against the Euro last night as the shift in dialogue from the ECB’s chairman Trichet prompted investors to speculate that the hawkish Central Bank will moderate its stance over the coming months.
The Pound recorded an all time low at 1.2218 versus the Euro earlier this month but the deteriorating outlook for growth in the Euro-zone has led to concerns that Germany slipped into a recession in the second quarter, while falling commodity should feed through to the broader economy and ease inflationary pressures.
The daily fundamentals have paled in significance in recent weeks as the fallout from the U.S government’s decision to intervene in an unprecedented act to restore stability dominates current trading conditions and the Pound shrugged off reports that UK mortgage approvals fell to the lowest level in a decade.
The report from the British Bankers’ Association showed that bank’s granted the fewest number of loans for home purchases since record began in 1997 as falling property values and tighter credit conditions deterred buyers and brought the housing market “to its knees”.
A separate report from Rightmove Plc earlier this week showed that prices had declined across the country while the 64% drop in mortgage approvals this year is just the latest indication that the slump in the UK property market shows few signs of abating and that may force the
Bank of England to cut interest rates for the first time since April.
The Pound is back within the well established trading range versus the Euro but the dwindling sense of optimism surrounding the outlook for the Euro-zone may see the pair test the resistance above 1.2800 in the short-term but a break below 1.2450 would signal a further move to the downside.
In the smouldering aftermath of last week’s near financial meltdown, the declining appetite for the Euro could be considered somewhat surprising considering that none of the major European Banks hit the headlines expressing severe difficulties to the same extent that hit Lehman Brothers Plc and threatened to consume HBOS Plc.
Nevertheless, the single currency recorded losses against a basket of currencies as a report from the Royal Bank of Scotland showed that Europe’s manufacturing and service industries contracted at the fastest pace in over six years this month.
The index dropped to a reading of 47.0, the lowest since November 2001, from 48.2 in August with a reading below 50.0 indicates contraction as the seizure of credit markets intensified and slowing overseas demand saw companies rein in production.
The sustained slump in European manufacturing and service sector growth indicates that the economy isn’t recovering after shrinking in the second quarter for the first time in a decade while the ECB has cut its growth forecast for this year to just 1.4%.
However, the Central Bank are unlikely to lower interest rate immediately and will probably wait for the 30% drop in oil prices to feed through to the economy and bring consumer price inflation back from the highest level in 16-years.
The focus this morning will fall on the German Ifo sentiment index for business confidence in the region and the report is expected to confirm that expectations worsened between August and September, reflecting the dwindling outlook for growth.
The Dollar continues to struggle against the majors as economists debate on whether the government’s proposal to inject $700 billion in the failing U.S mortgage market will fail in bolstering the economy as the national debt increases by a staggering $1 trillion.
The dwindling appetite for the U.S currency is likely to continue in the short-term as the plan faces congressional scrutiny that threatens to delay passage of the rescue of financial institutions while the Senate will consider testimonies from the Fed Chairman Ben Bernanke and U.S Secretary Henry Paulson.
The tentative price action surrounding the Dollar yesterday indicates that the market is waiting for some direction regarding the details of the bailout but a separate report from Morgan Stanley forecasted that short-term Dollar pressure will subside as the market absorbs the
government’s proposal.
Data Released 24th September
U.K 11:00 CBI Distributive Trades Survey (September)
EU 09:00 Current Account (July)
GER 09:00 Ifo Index (September)
U.S 15:00 Existing Home Sales (August)
written by Adam Solomon
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- The Pound rose against both the Euro and the Dollar yesterday as BoE policy maker Bean warns of persistant inflationary concerns
- The Dollar weakens on speculation that the Fed will tighten monetary policy, fuelling concerns that economic growth slowed into the second quarter
- The Pound declines against the Euro after the BoE lift UK interest rates but fail to deliver an insight into future monetary policy
- The Dollar makes gains amid reports that the Federal Reserve released £200 billion in liquidity in co-ordination with other Central Banks
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