by Adam Solomon
The Pound rallied towards the strongest level in two weeks against the Euro yesterday, as European officials delayed an announcement on a possible resolution to the sovereign debt crisis until Wednesday. The much-anticipated announcement is thought to involve a recapitalization of banks, while raising the size of the bailout fund for struggling Euro-zone economies.
The Pound rose towards 1.15 in early trading in London and consolidated on Friday’s gains, as a report showed that the UK budget deficit narrowed in September by more than initial forecasts. The UK’s net borrowing for banks shrank to 14.1 billion from 15.4 billion a year earlier. The Prime Minister David Cameron and the French President Nicolas Sarkozy argued over the weekend for the right of non-euro nations to attend Wednesday’s EU summit, as leaders struggle to find a workable solution.
Sarkozy said that if Britain wanted to be involved then it should have joined the Euro. The Euro also weakened against the Dollar, falling from a near-six week high prior to the weekend, after a report showed that European services and manufacturing output contracted in October at the fastest pace in two years. The reports combined only add to fears that the European economy is hurtling towards a recession and the safe haven currencies benefited from the sudden increase in risk aversion.
The Pound lost momentum later in the day, amid concern that the UK economy is stalling with officials set to reveal that gross domestic product contracted in the third quarter. David Cameron warned yesterday that the ongoing turmoil in the Euro-zone is having a “chilling effect” on the UK economy. UK government bonds fell as stocks rose last night, strengthening the Australian Dollar against the Pound.
It is believed that once European officials finally announce an extension to the bailout fund and a recapitalization of banks, the focus will then switch to growth differentials and on that basis the Pound is likely to weaken against the majors. The UK currency has depreciated 1.2% in the past six months, as the government implemented the toughest spending cuts in the post-war era.
The Pound hit resistance just under 1.60 against the Dollar and initially retreated to test support in the region of the 1.59 area. There will be further concerns surrounding the domestic economy, as personal incomes remain constrained, adding to pressure on spending. There is also further uncertainties surrounding the impact of the latest round of quantitative easing.
The Euro fell against the Dollar for the first time in five trading days, as European stock markets fell before Wednesday’s EU summit, amid concern that leaders are struggling to contain the region’s debt crisis. The single currency weakened 0.2% to 1.3905 and declined versus the Yen, as reports this week will show deteriorating consumer confidence in Germany and France.
The Euro encountered resistance in the region of 1.3950 against the Dollar and dipped to lows near 1.3825, following data that showed manufacturing and services indices weakened last month to the lowest level since the third quarter of 2009. There was particular focus on the Italian debt problem with increased fears surrounding the Italian economy. The Prime Minsiter Berlusconi called an emergency cabinet meeting to discuss austerity measures, as the ECB continued to buy bonds.
U.S 14:00 – Case Shiller House Prices (August)
U.S 15:00 – Consumer Confidence (October)
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