by Adam Solomon
The Pound strengthened against the Euro yesterday, but the UK currency lost further ground versus the U.S Dollar, slipping back under 1.60 in early trading, as risk appetite deteriorated. A report from the Chartered Institute of Personnel and Development said that an index of UK employers’ hiring intentions weakened significantly, as the crisis in the Euro-zone deepened.
The result of the data adds to recent concerns that the European debt crisis and UK government spending cuts are weighing heavily on the labour market. The report comes ahead of the official unemployment figures released later this week, which are expected to show that claims for jobless benefits rose for an eighth straight month in October.
The Bank of England is also due to present new economic and inflation forecasts this week and a further downgrade in growth projections is expected for the coming year. The Euro also declined against the Dollar for the first time in three days, as Italian borrowing costs soared again, fueling concern that the new government will struggle to contain the debt crisis.
The Pound once again benefited from its position outside the Euro-zone as a relative safe haven to the crisis and the UK currency rose significantly above 1.16 by the close of trading last night. The Pound actually gained versus all of the 16 most actively traded currencies, strengthening the most against the Australian Dollar and the Swiss Franc.
There is real concern that the debt crisis engulfing Greece and Italy is spreading to Spain, as 10-year bond yields in the nation rose above 6% yesterday for the first time since the Euro was introduced in 1999. The Pound is being viewed as a safer alternative to the Euro and at this stage appears immune to the debt crisis, despite concerns that the economy will contract in the fourth quarter.
The Pound hit strong resistance at 1.6080 against the Dollar and fell sharply through the course of the day to lows around 1.5880. There are expectations that the Bank of England will again downgrade its economic growth forecasts for the UK economy in tomorrow’s quarterly inflation report. There was also a suspicion that it would be difficult to attract further defensive funds into the UK from the Euro-zone, given that yield differentials have already moved sharply against the UK currency.
A report this morning from the Office of National Statistics is expected to show that UK inflation probably fell from a three year high in October and may slow further over the coming months, as Europe’s debt crisis impacts the economic outlook. Consumer price inflation probably slowed to 5.1% from 5.2% in September and the BoE governor Mervyn King will have to write yet another public letter of explanation to the Chancellor George Osborne.
The Euro came under further selling pressure against the Dollar yesterday, amid concerns that the debt crisis is spreading to other high deficit nations like Spain and Portugal. The Italian government did secure a sold response in the latest bond auction, but there was still a sharp rise in yields compared with the previous sale and concerns that the new government will struggle to contain the crisis.
Even more alarmingly French bond yields also rose through the day, as markets again fretted over the AAA credit rating and the prospect of a cut. The new Greek government stated its determination to stay within the Euro-zone, but markets remained unconvinced, especially with the New Democracy party stating there would be no support for further austerity measures.
Confidence in the Euro-zone will remain fragile with the latest GDP data weaker-than-expected in France and Germany, which further undermined the Euro. There were no major U.S data releases during the day and there was an increase in unease surrounding the budget situation, as officials struggle to agree upon a cohesive strategy to solve the budget deficit.
U.K 09:30 – DCLG House Prices (September)
U.K 09:30 – Consumer Price Index (October) – RPI
EU 10:00 – Trade Balance (September)
EU 10:00 – Flash GDP (Q3)
GER 10:00 – ZEW Index (November)
U.S 13:30 – Empire State Index (November)
U.S 13:30 – Producer Price Index (October)
U.S 13:30 – Retail Sales (October)
U.S 15:00 – Business Inventories (September)
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