GBPEUR/GBPUSD
The Pound rallied the most against the Euro since the beginning of June yesterday, while the UK currency also surged towards $1.60 versus the U.S Dollar, after an index of retail sales rose to the highest level in five months. A report from the Confederation of British Industry showed that retailers are more optimistic this month, than at any stage since April.
The index of orders placed on suppliers also rose to the highest level since February last year and the survey yesterday adds to recent evidence that the UK economy may be emerging from the worst recession since the Second World War. Seperate reports yesterday showed that the economy contracted less than previously estimated in the second quarter, while mortgage applications stayed close to the yearly high.
Andy Clarke, chairman of the CBI distributive trades panel, said that “after such a difficult summer, it’s encouraging to see signs that conditions in the retail sector are stabilising. However, with unemployment rising, wage growth low and consumers building up their savings, spending is likely to remain subdued for some time.”
The Pound also made gains versus the majority of the 16-most actively traded currencies, after reaching another 12-year low against the Australian Dollar earlier in the session. According to a report from the Office of National Statistics, gross domestic product shrank just 0.6% in the three months through June, compared with a prior estimate of 0.7%.
The report yesterday added to recent suggestions that the beleagured UK economy is finally emerging from the recession, after five consecutive quarters of contraction. The Chancellor of the Exchequer Alistair Darling said on Monday that the recovery may be gathering momentum by the end of the year, and supported the government’s stimulus plan to purchase bonds.
UK gross domestic product slumped 2.5% in the first quarter, the most since 1958, and was revised lower from a 2.4% decline. The recession has now reduced GDP by 5.6%, while the widening UK debt position is also a grave concern for policy makers. The statistics office confirmed yesterday that the economy has contracted 5.5% from a year earlier, the most since records began in 1956.
The government have given assurances, as recently as last week, that current stimulus spending will be maintained until the recovery is secure. The Treasury plans to sell an extra £220 billion in debt this year and expects a deficit in 2010 of 12% of the economy. The Labour party fell to third place in the polls for the first time since 1982 in an opinion poll published yesterday.
The Bank of England’s chief economist Spencer Dale said last week that the economy has “turned a corner”, the UK faces a “slow and protracted” recovery from the recession, as unemployment continues to rise. The number of people out of work and seeing employment rose in the three months through July to 2.47 million, the highest level since 1995.
Lena Konileva, an economist at Tullett Prebon in London, said yesterday that “the fiscal stimulus is likely to subside from the middle of next year and it leaves a lot of uncertainty about the sustainability of growth momentum. The Bank of England may look to counterbalance the draconian tightening that’s in store from the next parliament.”
The Confederation of British Industry also reported yesterday that the UK economy will expand 0.3% in the third quarter and 0.4% in the last three months of the year. The Bank of England will start raising interest rates from the current record low of 0.5% in the first half of 2010, despite recent estimates that the Pound will fall towards parity with the Euro in the first quarter.
Neil Mellor, a currency strategist at BNY Mellon Corp, said that “the CBI report has underpinned Sterling’s leap. Retail sales were very good.” Investors just needed a good reason to stop selling the Pound and sales report yesterday provided the perfect platform for Sterling to bounce back against the Euro and the Dollar.
Elsewhere, the Pound also received a boost yesterday, after a report from the BoE showed that mortgage approvals increased again in August, as banks granted 52,317 loans to buy homes, close to the highest level since April 2008. The report follows recent data from Hometrack Plc, which showed that prices rose to the highest level this year in August.
The UK currency declined last week against 14 out of the 16 most actively traded currencies, after the Governor of the BoE Mervyn King said that it’s weakness was “very helpful” to the economic recovery. The Pound has fallen 2.9% against the Dollar since June 30th and a staggering 7% in value versus the Euro, after climbing 13% in the first half of the year.
Options trading showed yesterday that the odds of the Pound weakening to parity with the Euro by the end of March climbed to more than one in four, underlining growing speculation that the Bank of England favours a weaker currency. Therefore, why would investors encourage buying support for Sterling when it’s own Central Bank wants to drive it lower.
The Bank of England met with economists in London yesterday to discuss the much discussed asset-purchase plan. Policy makers expressed concerns that investors are exaggerating the significance of King’s comments last week that the Pound’s decline has been good for UK exports. The Central Bank also said that it has no plans to change its deposit rate soon and that policy makers are satisfied with the effects of the program on boosting money supply.
EUR/USD
The Dollar rose to the highest level in two weeks versus the Euro yesterday, breaching the $1.46 level, after Russia said that it will maintain the share of U.S Treasuries in its international currency reserves, reducing concerns that central banks will diversify away from the U.S currency. The Dollar also stood firm even as consumer confidence unexpectedly fell in September, after unemployment increased.
The Conference Board’s index of confidence dropped to a reading of 53.1, from a revised 54.5 in August. Unemployment is expected to rise to 10% this year, even as the pace of job losses slows and yesterday’s report correlates with a recent statement from the Federal Reserve that tighter credit conditions are curbing household spending.
U.S stocks fluctuated between gains and losses, as a separate report showed that home values in 20 metropolitan areas fell less than forecast in the year ending in July. The Fed may be once of the last major central banks to raise interest rates, putting the recovery of the Dollar at risk, as foreign investors will be reluctant to invest more in the U.S.
Data Released 30th September
U.K 00:01 Gfk Consumer Sentiment (September)
GER 09:00 Unemployment (September)
EU 10:00 Flash HICP (September)
U.S 13:15 ADP Employment Report (September)
U.S 13:30 Final GDP (Q2)
U.S 14:45 Chicago PMI (September)
written by Adam Solomon
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