The Pound rallied well above 1.16 versus the Euro last night but the UK currency was unable to regain the $1.65 level against the U.S Dollar and dipped to lows around $1.6350 as the U.S currency secured wider support. Global equity markets were still relatively firm in Europe with banking shares rising and this provided some degree of appetite for Sterling.
UK stocks rose as Morgan Stanley advised buying Schroders Plc and mortgage approvals climbed to the highest level in 14-months in June, amid optimism that the worst of the recession has past. The benchmark FTSE 100 Index added 0.4% to 4,547.53 by the close of trading last night, resuming gains after the first drop in 12-days on Tuesday.
The measure has surged 10% higher since July 10th after a number of U.S companies, including Goldman Sachs Group Inc, reported second quarter results that exceeded estimates. The U.S Federal Reserve Chairman Ben Bernanke said that the U.S economy is showing “tentative signs of stabilisation.”
UK mortgage approvals surged higher in June, adding to signs that the housing market is recovering as the recession eases and banks become more willing to increase lending. According to the report from the Bank of England, banks and lenders granted 47,584 loans in June, compared with 44,169 in May, ahead of preliminary estimates of 47,000.
Elsewhere, a report from real-estate agents Hometrack Ltd, showed that house prices held their value for a third straight month in July. Bank of England policy makers Andrew Sentence said last week that the bank may consider a pause in its £125 billion asset-insurance program if economic forecasts published next month point to a recovery.
George Buckley, an economist at Deutsche Bank AG in London, said that “we’re expecting to see mortgage approvals rise as the banking crisis begins to ameliorate. The bank will be mildly encouraged by these figures. I don’t see a change in bond purchases or in rates.” Net lending secured on dwellings rose to £343 million, while gross mortgage lending was £1.98 billion in June, the highest level this year.
The average house price in Britain held steady at £155,600 this month and although the reading is still down an annual 7.7%, the slump in property prices appears to have abated. Sentence said last week that there may be “some evidence of positive growth in the second half of the year”, and may shift to a watching stance next month on their plan to revive credit conditions through quantitative easing.
The Pound will remain susceptible to a likely sell-off in equity markets and Euro buyers would be well placed to take advantage of the current upside rally or at least place a stop order around 1.15-1.16 to protect against an adverse move in the market. The weakness in lending will also maintain underlying fears over the economy and will tend to unsettle sterling over the coming weeks.
The Euro weakened steadily against the Dollar yesterday amid a series of unfavourable developments, as Chinese equity markets declined sharply over 5% and encouraged investors to seek the refuge of safe haven assets. Commodity prices also weakened, which was a negative influence, while Euro-zone economic data was weaker-than-expected with a provisional 0.1% drop in German consumer prices.
The IFO institute in Germany also reported that lending was more restrictive during July, which will maintain fears over a credit crunch in the economy. In the U.S the headline durable goods orders data was markedly weaker-than-expected with a 2.5% decline for June. However, order actually increased 1.1%, the most in four months, which signaled that manufacturing may expand in the second half of the year.
The Fed’s Beige Book reported that the downturn was easing in most districts and was slightly more upbeat that the previous report. However, a separate gauge of the report indicated that weakness in the labour market and there was also a deterioration in the commercial property sector. Bank lending also declined in most categories, which will maintain concerns that any recovery will stall.
The focus today will fall on the EC sentiment indices with sentiment expected to show a further modest improvement, while remaining at relatively low levels, indicating a sluggish recovery. The Euro dipped to lows near $1.40 in U.S trading yesterday before a corrective recovery to the $1.4050 region and the Dollar will struggle to consolidate on recent gains if stock markets continue to rally.
Data Released 30th July
U.K 07:00 Nationwide House Prices (July)
GER 09:00 Unemployment (July)
EU 10:00 EC Business Climate Index (July)
EU 10:00 EC Economic Sentiment (July)
– Consumer Sentiment
– Industrial Sentiment
– Services Sentiment
U.S 13:30 Jobless Claims (w/e 25th July)
written by Adam Solomon
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