GBPEUR/GBPUSD
The Pound declined heavily against the higher-yielding currencies, as an element of confidence returned to financial markets, despite widespread concerns over the spread of swine flu. The UK currency rallied to a high of $1.4812 against the U.S Dollar, as the rise in risk appetite diminished the allure of U.S assets as a haven.
UK stocks advanced, led by a rebound in banking shares and metal producers, after HSBC Holdings plc recommended Barclays Plc and Lloyds Banking Group Plc. The FTSE 100 Index jumped 2.3% on the session, as Barclays, the U.K’s third-largest bank, and Lloyds allied over 8% to wipe out two consecutive days of declines.
The UK benchmark index has rebounded 19% from its low this year on March 3rd, amid optimism that the worst of the global recession may be over. However, the FTSE is still down over 37% since June 2007, as banks in Europe reported more than $395 billion in net credit losses. Global stocks declined earlier this week on concerns that U.S lenders will need to raise additional capital and the outbreak of swine flu will hamper economic activity.
The Pound dipped to lows just under 1.1100 against the Euro yesterday and gilts rose, after the Chancellor of the Exchequer Alistair Darling said that UK interest rates would remain at record low levels. The two-year yield fell to close to its lowest level in almost four months, as Darling said in a conference to business leaders that interest rates were “low and likely to remain low”.
The Bank of England have cut UK interest rates by 4.5 percentage points since October to the lowest level in history at 0.5%. Policy makers have also embarked on a period of quantitative easing, through the creation of new money to purchase government and corporate bonds. The BoE confirmed on March 5th that it will buy up to £75 billion of toxic assets, as part of the asset insurance program.
The Pound will continue to make gains against the Dollar in the near-term as the aggressive swings in risk sentiment continue to dominate the market. The UK currency may also find some support against the Euro, amid the release of key economic data. The Gfk gauge of consumer confidence is expected to show an improvement in sentiment for April, while a separate report from Nationwide will probably report a modest increase in UK house prices.
EUR/USD
The Euro rallied above $1.3300 against the Dollar yesterday but the single currency may struggle to maintain its momentum, amid speculation that the U.S economy will recover faster than the Euro-zone. According to estimates from Commerzbank AG, the Euro’s advance may come to an abrupt end between $1.3315 and $1.3330.
European retail sales declined the least in 11-months in April, after further government stimulus packages improved consumer confidence and encouraged shoppers back to the high-street. The Purchasing Managers’ index showed that a measure of retail sales rose to a reading of 48.4, from 44.1 in March, as governments fight the worst recession since the Second World War.
Inflation has fallen below the ECB’s target of 2%, which has boosted household spending, but the impact may be limited as rising unemployment takes its toll. Retail sales in Germany have fallen at the slowest pace since May 2008, while sales have also declined at a slower pace in Italy and France.
A separate report yesterday showed that European confidence in the economic outlook increase for the first time in 11-months in April. The surprisingly upbeat tone of the report has fuelled hopes that the economy may now be past the worst of the recession but “with Euro-area domestic demand likely to remain weak, any resumption in growth may have to wait for world demand to recover.”
The European Central Bank have refused to cut interest rates as aggressively as the Bank of England the Federal Reserve. Policy makers are debating on whether to follow their counterparts in buying assets to combat the economic slump and engage in some method of quantitiative easing. The governing council committee are split on how aggressive to be at a time when interest rates are already at a record low of 1.25%.
The Dollar failed to find any support against both the Pound and the Euro, even after U.S gross domestic product plunged again in the first quarter. The economy contracted a greater-than-expected 6.1% annual pace, after contracting 6.3% in the last three months of 2008. The report from the Commerce Department reflects the worst recession in at least half a century, as inventories slumped and further declines in the housing market exacerbated the slowdown.
The Federal Reserve have refrained from increasing the purchases of Treasuries and mortgage-backed securities, saying that the economy is showing some signs of recovery. Household spending has increased but remains constrained due the escalating job losses and tighter credit conditions.
Data Released 30th April
U.K 00:01 Gfk Consumer Confidence Survey (April)
U.K 07:00 Nationwide House Prices (April)
GER 09:00 Unemployment (April)
EU 10:00 Flash HICP (April)
EU 10:00 Unemployment (March)
U.S 13:30 Employment Costs (Q1)
U.S 13:30 Initial Jobless Claims (w/e 25th April)
U.S 13:30 Personal Income / Consumption (March)
– Core PCE
U.S 14:45 Chicago PMI (April)
writtenb y Adam Solomon
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