GBPEUR/GBPUSD
The Pound rallied strongly against the Euro yesterday, rising towards 1.1400 by the close of trading last night, while the UK currency also tested resistance at $1.6000 versus the Dollar, amid speculation that Britain’s financial institutions may weather the financial crisis better than their counterparts in Europe. Sterling moves were again influence by degrees of risk appetite and the UK currency gained ground in the day, as international equity markets rallied strongly.
Bank of England MPC member Timothy Besley stated that the government’s budget position would have been tackled in the medium term, while there was also some short-term room for maneuver. Underlying fears over the debt burden will still be a significant factor for the Pound and concerns would return quickly on a run of disappointing data.
The Chancellor of the Exchequer Alistair Darling said last month that the budget deficit this year will reach £175 billion, or 12.4% of gross domestic product, the highest proportion amongst the Group of 20 nations. The Treasury plans to auction a record £22 billion of gilts this fiscal year, 50% more than in 2008, in a last ditch attempt to drag the economy out of the worst recession since the Second World War.
The Pound rebounded from three consecutive days of losses, after reports in the Daily Telegraph cited a comment from Jochen Sanio, president of the banking regulator BaFin, who said that debt levels at German banks will blow up “like a grenade”. He went on to say that the problem will persist unless the coalition government plan to strengthen the financial sector.
The Euro also resumed the downward momentum against the resurgent Pound, after Euro-zone industrial orders fell in March for the eighth straight month. Michael Klawitter, a currency strategist in Frankfurt, said that “the amount of bad news that’s priced into the Pound quite considerably exceeds that priced into the Euro. Sterling is also being buoyed on concerns there will be further bad news about German banks.”
According to the report from the European Union’s statistic office, industrial orders in the 16 nations sharing the Euro fell an annual 26.9%, after a revised 34.2% drop in February. Economists had predicted a more modest decline, as orders slipped 0.8% on the month. Orders declined for an eighth straight month in March, as the worst recession in sixty years curtailed global demand for machines and equipment.
The European economy has contracted at the fastest pace in at least 13-years in the first quarter of this year, as companies scale back production and cut their workforce. However, the slowing pace of the decline in industrial orders adds to speculation that the recession may be relenting. The European Union has cut its outlook for the Euro-zone economy to forecast a 2009 contraction twice as deep as it predicted just three months ago.
The Pound maintained a firm tone this morning, as global risk appetite improves, despite reports from the Nationwide Building Society that showed full-year earnings fell 69%, following the rise in impairment charges and low interest rates. Euro and Dollar buyers can currently take advantage of the best exchange rates so far this year. It would be prudent to use a stop order around 1.1300 against the Euro and 1.5800 versus the Dollar to protect against an adverse decline in stock market sentiment.
EUR/USD
The Euro declined against the Dollar yesterday following concerns over the German banking sector and speculation that last week’s substantial gains were too large to sustain. The single currency depreciated for the first time in seven days, eroding gains that pushed the Euro to the highest level against the Dollar in four months.
The cautious tone extended into the U.S trading session, as the Euro dipped to lows near the significant support levels near $1.3860 versus the Dollar. Andrew Chaveriat, a technical analyst at BNP Paribas SA in New York, said that “Euro bulls are running out of buying power, a close below $1.3880 will signal further declines in the common currency.”
In addition, a report from UBS AG showed that the Euro is unlikely to extend its gains against the Dollar without a revival in global demand. “the European Union and the ECB desperately need global demand to rebound soon, even as the domestic economy is getting less help from fiscal and monetary stimulus than most other economies, to take pressure off the economy and the currency.”
The Dollar and the Japanese Yen declined against the majority of the 16-most actively traded currencies, after a government report showed that U.S consumer confidence rose to the highest level since September, reducing demand for the security of Dollar denominated assets. The Conference Board’s index of U.S consumer sentiment surged higher in May to record the biggest gains since April 2003.
The U.S currency posted its biggest weekly decline against the Euro in two months last week, amid speculation that a deterioration of U.S creditworthiness will make assets such as treasuries less attractive to investors. Nevertheless, the positive tone of the consumer confidence data increased optimism that the economy would recover later this year, and stocks subsequently advanced for the first time in five days.
The Standard & Poor’s 500 index increased 2.1%, amid speculation that the revival in the economy may encourage consumer spending, which accounts for roughly 70% of gross domestic product. However, rising unemployment and falling property values undermine that optimism and it will take time to establish a sustained rebound.
The sharp rise in global confidence is an important factor in boosting risk appetite, which saw the Dollar decline sharply towards $1.4000 against the Euro. The ongoing situation with General Motors Corp will be watched closely this week, amid strong expectations that the company is poised to file for bankruptcy. There will be some hopes than an easing of uncertainty will help boost sentiment and could weaken the Dollar further on improved risk appetite.
Data Released 27th May
U.S 15:00 Existing Home Sales (April)
written by Adam Solomon
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