by Adam Solomon
The Pound rallied against the U.S Dollar for the first time in three days yesterday, the UK currency touched upon the strongest level in two-months versus the Euro, after a report from Hometrack Ltd showed that UK house prices rose in April for the ninth consecutive month. The UK currency advanced against 13 out of 16 most actively traded currencies, as the report added to evidence that the economic recovery is gathering momentum.
The average cost of a home in England and Wales increased 0.2% from March, as prices rose just 1.8% from a year earlier, the slowest pace in three months. The UK property market’s momentum is waning, as more Britons lose their jobs in the aftermath of the worst recession in a generation. Political campaigning before the May 6th election is also undermining confidence, as speculation mounts of the first minority government since 1974.
Richard Donnell, director of research at Hometrack, said in a statement that “rising unemployment, lack of mortgage funding, public spending cuts and the prospect of tax rises post-election, continue to act as a back-drop to a fragile and increasingly polarised housing market.”
Ian Stannard, a foreign exchange strategist at BNP Paribas SA, said that “the Hometrack data was reasonably robust, which works in Sterling’s favour in the current environment. Sterling is getting support from the analysis of the latest opinion polls. The market assumes there is a chance the Conservatives could scrape through.” Therefore, if a poll shows the Conservatives’ lead has waned, the Pound is likely to lose ground from the current levels.
A separate report yesterday from Rightmove Plc showed that some Britons lost confidence in the outlook for the housing market, while half of consumers surveyed this month predicted that prices will be higher in a year’s time, down from 53% in January. George Buckley, chief UK economist at Deutsche Bank AG, said that house prices will fall by as much as 5% during 2011, as interest rates begin rising from the end of the year.
The preliminary first quarter growth figures showed that the UK economy expanded just 0.2% in the first quarter, half the face forecast by economists, pointing to anemic growth and increasing the prospect of a “double-dip recession.” Unemployment has risen to the highest level in 16-years and Britain’s main political parties are in the final two weeks of a campaign centered around plans to tame the public finances.
The Pound also gained ground after a YouGov Plc poll put the Conservative Party in the lead at 34% ahead of the May 6th election. Liberal Democrat leader Nick Clegg said yesterday that it would be “preposterous” for Gordon Brown to remain in power if Labour comes third in the popular vote. The UK currency was up 0.6% to $1.5473 against the Dollar and appreciated 0.9% versus the struggling Euro.
The Pound is also gaining on risk sentiment, as UK stocks rose for a second day, as mining companies climbed with metal prices. The benchmark FTSE 100 Index advanced 0.5%, extending this year’s advance to 6.3%, as the economy emerges tentatively from the recession. David Jones, chief market strategist at IG Index, said “commodity shares are playing their part once again. Looking ahead it is going to be company earnings that drive sentiment.”
The UK currency retreated from highs against the Dollar and the Euro overnight, as the polls still suggest an increasing likelihood of a hung parliament. Analysts at UBS AG said that the Pound may drop more if a single party does clinch a parliamentary majority and cuts the budget deficit too fast. Mansoor Mohi-uddin, chief currency strategist at UBS in Singapore, said “investors should be concerned if any party wins an outright majority and cuts the budget too quickly while the UK economy is fragile.”
The Euro dropped against all of the 16 most actively traded currencies yesterday, amid concern that the EU aid package for Greece won’t prevent the deficit crisis spreading to other member nations. The single currency fell to its lowest level since January versus the Pound and hit an annual low versus the Dollar, as Germany Chancellor Angela Merkel said that she won’t release funds for Greece until the nation has a “sustainable” plan to cut its deficit.
The Euro pared its loss against the Dollar, as Bundesbank President Axel Weber told CNBC that the Euro doesn’t have a “credibility” issue. However, Yu-Dee Chang, chief executive officer of ACE Investment Strategists LLC, said yesterday that “every time a resolution is announced, Germany comes out and says wait a minute, it’s not a done deal. That adds to uncertainty for the Euro.”
There was a fundamental lack of U.S economic data released during the day but speculation of reduced interest in dollar-funded carry trades provided a degree of support for the U.S currency. Investors will be cautious ahead of Wednesday’s FOMC interest rate announcement. Expectations of a shift in the Fed’s language have consistently disappointed.
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