GBP/USD GBP/EUR
Following on from last week, the Pound recorded its biggest weekly advance against the Dollar in seven weeks, after the U.S Federal Reserve announced that it would undertake quantitative easing measures and start printing money to buy Treasuries.
The Fed’s decision to utilise less conventional techniques to revive the economy is undermining Dollar sentiment, while the Bank of England also confirmed that it would purchase corporate debt to bolster financial markets.
The introduction of quantitative easing measures through excessive money supply threatens to de-value the Dollar, as the greenback suck towards $1.3700 versus the Euro and $1.4500 against the Pound, the weakest level since January 29th.
The Dollar crumbled against the majors last night in the aftermath of the FOMC statement, as the Fed announced that it will start buying Treasuries and increase its purchase of mortgage debt. Federal Reserve policy makers said that they will buy as much as $300 billion of U.S government bonds and step up the purchase of mortgage-backed securities, expanding the Bank’s balance sheet by up to $1.15 trillion.
According to currency strategists at Citigroup Inc, “the implications of the Fed decision are unambiguous, the Dollar should weaken”. The U.S currency may continue the downside momentum in the near-term and has lost over 3% in value versus the Pound, as investors are encouraged to sell out of Dollar denominated assets.
The Pound held close to the highest level in a month against the Dollar on Friday, after the newly appointed member of the Bank of England’s monetary policy committee, Spencer Dale, said that the UK economy will begin growing in the second half of the year.
According to the minutes from the Bank’s last policy-setting meeting, UK policy makers voted unanimously to start printing £75 billion to pump into the financial sector and fight the recession. The nine-strong committee also cut the benchmark interest rate to an historic low of 0.5%. The Chancellor of the Exchequer Alistair Darling gave the Central Bank the go ahead to buy up to £150 billion to cleanse UK banks of toxic assets.
According to a report from BNP Paribas SA, the Pound will also be supported by a rally in banking shares, as the measures announced last week have a global effect and increase confidence. “We view the quantitative easing introduced in the UK and then adopted in Switzerland and the U.S as Pound bullish”.
UK stocks gained on Friday, extending the FTSE 100 Index’s second consecutive weekly advance, led by an increase in banking stocks. The index increased 2.4% on the week, after the Federal Reserve’s announcement and investors are speculating on whether we are entering a “bottoming process for equities.”
The Pound stood firm and managed to cling to recent gains made against the majors, despite reports that UK house prices face a decline of 40% in nominal terms, as the most aggressive policy easing in history fails to revive lending conditions.
According to the report from Sanford C. Bernstein, prices have already slipped 20% in the past year but property crashes in the past were largely masked by the effects of inflation. “The key difference this time is that more of the drop in the income ratio actually hits nominal prices” since inflation is now lower.
UK housing sales have slumped to the lowest level since records began in 1978, as the deepening recession pushed down prices. The report from the Chartered Institution of Chartered Surveyors also showed that the UK economy suffered the worst contraction since 1980, in the final three months of 2008.
Elsewhere, the Prime Minister Gordon Brown has come under further pressure as unemployment rise to the highest level in a decade. An independent report from the National Audit Office increase his woes, as it said that the government allowed Northern Rock Plc to keep writing risky loans, even after the lender sought emergency funding from the Treasury.
The auditor also found that the Treasury failed to adequately examine the bank’s books before they took it over in February last year, allowing the lender to pursue a flawed business plan that resulted in a £1.4 billion loss.
The focus this week will fall on whether the Pound can sustain last week’s gain, while comments from the Bank of England governor Mervyn King will be watched closely for further evidence on the economic trends and bank policies.
A pessimistic tone will risk renewed selling pressure on the Pound and a number of key economic indicators are due for the release. The CPI index will probably reveal that the annual pace of inflation moderated in February, while UK retail sales probably fell a further 0.4% on the month, amid tighter lending conditions and fears over job security.
EUR/USD
The Euro again met resistance above the $1.3700 level versus the Dollar, and remained largely resilient against a resurgent Pound, as ECB policy makers resist giving any indication of implementing less conventional techniques to revive the economy.
ECB governing council member Nout Wellink said that the Central Bank may cut interest rates again in March, as consumer prices continue to fall and encourage spending. The ECB have lowered interest rates by 2.75 percentage points since October, to a record low of 1.5%, in a seemingly vain attempt to halt the worst recession since the Second World War.
The Bank of England, the Federal Reserve and the Bank of Japan have all gone further, cutting their benchmark interest rates to close to zero and have confirmed that they will buy government bonds to stimulate their economies.
Wellink confirmed that “at this moment we don’t foresee that process” and the ECB’s reluctance to undertake such measures will be supportive to the Euro in the near term. Inflation was at 1.2% in February, close to the lowest level since 1999. The Central Bank aims to keep the rate jut below 2.0% but has forecasted that prices will plunge to 0.4% this year, threatening a period of deflation, as the economy contracts 2.7%.
In addition, ECB member and Bundesbank President Axel Weber said that the Bank will lower interest rates again and may extend the maturities of its loans to banks, pushing down long-term borrowing costs.
In a speech in Berlin, Weber confirmed that the ECB still has “room to maneuver” and suggested that he favours expanding the Central Bank’s existing policy of lending, rather than following the U.S Federal Reserve and Bank of England in buying government or corporate debt.
In terms of economic data, the Euro stood firm despite reports that European industrial production shrank by the most on record in January, as the steepest global recession in over sixty years forced companies to cut output and curb investments.
Data Released 23rd March
U.S 14:00 Existing Home Sales (February)
written by Adam Solomon
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