GBPEUR/GBPUSD
Following on from last week, the Pound declined against the majors on Thursday, dropping towards the support at 1.1270 against the Euro and $1.5500 versus the Dollar, after Britain’s top level credit rating said that it is more likely to be cut by Standard & Poor’s, as the government’s finances deteriorate, following the worst recession since the Second World War.
The U.K’s AAA outlook was lowered to “negative” from “stable” because of the nation’s increased budget deficit. The government’s budget deficit this year will reach £175 billion, or 12.4% of gross domestic product. A downgrade in the credit rating would make Britain at least the fifth European nation to be cut this year because of the ongoing economic slump.
S&P; lowered the outlook for the UK’s credit rating to negative, while Moody’s Investors Service said in a statement yesterday that the UK’s top Aaa sovereign credit rating remains unchanged with a “stable” outlook because the government can absorb and reverse the debt burden. The government has given the Bank of England the authority to purchase up to £150 billion of assets with newly printed money, in an attempt to lower borrowing costs.
The government’s efforts to shore up the nation’s finances are being undermined by an economy entrenched in the worst recession since 1991. Unemployment surged higher to 2.2 million in March, the highest level since 1996, while tax income dropped 10% over the past year. The International Monetary Fund expects UK gross domestic product to contract 4.1% this year, the most since the Second World War.
The Pound dropped from the highest level in six months against the U.S Dollar, but recaptured most of the early losses throughout the course of the day, amid speculation that a downgrade wasn’t imminent as two other rating companies affirmed that the UK’s outlook is “stable”. The UK currency touched a high of $1.5946 over the weekend, close to the highest level since November 10th, before closing back towards $1.5850 following the market holiday.
The Pound has gained 5.7% in value against the Dollar this month alone, and a further 1.8% versus the Euro, as UK retail sales increased and the housing market showed tentitative signs of recovery, as the worst of the recession appears to be over. A report from the Nationwide Building Society showed that house prices fell less-than-expected in April, after posting a surprise increase in March. Consumer confidence also climbed to the highest level in a year.
UK stocks fell the most in a month following the announcement from Standard & Poor’s Rating Services, while the former Federal Reserve Chairman Alan Greenspan signaled that the financial crisis is not over yet. HSBC Holdings Plc and the Royal Bank of Scotland Group Plc declined more than 3%, while the FTSE 100 Index retreated 2.8% on the session, making the measure the worst performing this year among the 23 developed markets.
Concerns over a medium-term downgrade in the UK credit rating will remain an important negative factor for Sterling. The underlying budget data also remained very weak with a £8.5 billion borrowing requirement for April, following a £18.2 billion shortfall previously and there will be significant medium-term currency risks from the debt situation.
The Pound tumbled against the majors yesterday, amid growing concerns over the security of UK denominated assets. Investors were encouraged to sell the Pound, amid speculation that the nation’s credit rating will be cut further, following last week’s announcement by Standard & Poor’s. In addition, the Treasury plans to auction a record amount of gilts in this fiscal year, 50% more than in 2008.
The UK currency lost ground against the majority of the 16-most actively traded currencies, falling 0.4% against the Euro, after reports on Friday showed that UK gross domestic product in the first quarter dropped 1.9%. The result matched initial estimates, while consumer spending fell 1.2% and investment declined 3.8%.
UK consumer spending slumped by the most since 1980, while companies drained inventories at a record pace in the first quarter. The figures highlight the challenge facing the government, after the BoE governor Mervyn King said that the recovery in the economy will be “slow” and “protracted”. Willem Buiter, a former BoE policy maker, said that “hopefully the first quarter was the biggest rate contraction. But the economy will be shrinking into next year, we’ll be in a recession and have sharply rising unemployment for the next year or year and half”.
Outgoing Bank of England policy maker David Blanchflower said that the UK economy may be about “three quarters” through the recession. The Deputy Governor Charles Bean said that the “bottom in activity may not be far off” and the pace of economic contraction should ease. Yilin Nie, a currency strategist at Morgan Stanley, confirmed that although UK economic data, “as highlighted by the recent rating outlook downgrade, we think much of the bad news is in the Pound price.”
Following the Bank Holiday, the focus this week will fall on consumer data, with just the CBI distributive trades surveys and consumer confidence data due for release, alongside the latest Nationwide house price report for May. The Pound finished the week in a strong position against the Euro and the Dollar, a trend that is likely to continue in the short-term, amid a general pick-up in market sentiment.
EUR/USD
The Euro fell for the fist time in seven days against the Dollar yesterday, after a report in the Daily Telegraph cited a German banking regulator saying that debt at the nation’s biggest lenders may increase. The subsequent deterioration in risk appetite saw stock decline, as traders flocked the security of lower yielding assets, such as the Japanese Yen and U.S Dollar.
In addition, the Yen actually advanced against all of the 16-most actively traded currencies, following reports that North Korea test-fired two short-range missiles, a day after conducting an undergorund nuclear test. The Euro declined to a low of $1.3947 against the Dollar, from $1.4017 in New York, after climbing to a high of $1.4051, the highest level since January 2nd.
The single currency also came under pressure, after Moody’s Investors Service placed its rating outlooks for Bulgaria’s DSK Bank AD and First Investment Bank Ltd on review for possible downgrade. The credit rating issure is likely to dominate market sentiment over the coming weeks and any Dollar gains may be temporary, amid speculation that bond sales this week will renew concerns that a record supply of Treasuries will jeopardise the U.S’s AAA credit rating.
Data Released 26th May
EU 09:00 Current Account (March)
EU 09:00 Industrial Orders (March)
U.S 14:00 Case Shiller House Prices (March)
U.S 15:00 Consumer Confidence (May)
written by Adam Solomon
Related posts:
- The Pound continued to decline against the majors yesterday on speculation Britain will lose its AAA credit rating
- The Pound declines against the majors, after S&P downgrade the UK’s credit rating to negative
- The Pound slumps against the majors after Barclays Plc’s credit rating was downgraded two levels amid fears of more writedowns and bad debt
- The Pound declines against the Euro, amid threats that the nation’s AAA credit rating will be slashed
- The Pound remained largely unchanged despite a further drop in consumer credit and house prices
