The Pound initially gained some support against the Dollar yesterday in the foreign exchange markets, rising towards $1.5150 in London before a sharp retraction later in the day. The UK currency also peaked just above 1.11 versus the Euro, as a general improvement in risk appetite underpinned support. Political uncertainty remained an important factor, with the latest opinion poll still pointing to the risk of a minority government.
There will be continuing concerns that political factors that may prevent any significant short-term corrective action on the escalating UK budget deficit. Speculation surrounding a hung parliament will weigh heavily on Sterling in the build up to the election and the UK currency slipped back towards the major support levels at $1.50 against the Dollar and 1.10 versus the Euro.
The Pound failed to find any buying support later in the session, despite comments from Bank of England policy maker Kate Barker, who unexpectedly expressed some optimism that the UK economy is recovering. The differing views from a number of committee members is becoming increasingly apparent over the past few weeks, which will tend to deter strong sterling support.
In a speech to the National Institute of Economic and Social Research, Barker said that "there are grounds for optimism from recent data that the recovery is broadly on track. I don't think it is yet possible to be confident in the pace of the recovery and still expect the path to be bumpy. But some of the severe downside risks have diminished."
The Bank of England's unprecedented £200 billion asset purchase program has helped the economy rebound from the longest recession on record by cutting costs, supporting asset prices and boosting confidence. Barker also said that the Central Bank kept the plan's size on hold for a second month last week, as officials adopt a "wait and see" policy.
Her comments yesterday seem to lean towards further quantitative easing as she said that "I don't consider the evidence suggests that this rise in asset prices has gone too far and therefore do not believe that this has become another risk to future economic stability. My concern is that this channel might become less powerful if quantitative easing were to be extended."
UK stocks advanced yesterday, extending the biggest weekly jump since July for the FTSE 100 Index, which rose 0.1% in London. UK stocks have rallied 11% since February 5th, as UK companies, including Barclays Plc and RBS reported earnings that beat analysts' estimates and investors speculated that the European Union will bailout Greece.
The French President Nicolas Sarkozy said that the Euro-zone is ready to support Greece should the government struggle to fund its budget deficit, arguing that the country is "under attack" from speculators. In the UK, underlying confidence in the debt position is also under scrutiny and the Pound dropped to lows against the majority of the 16-most actively traded currencies.
According to Goldman Sachs Group Inc, the Pound's drop last week to the lowest level in 10-months against the Dollar may help the UK economy recover faster than the Euro-zone. Concerns over the UK elections this may result in the first minority government since 1974 and has contributed heavily to the Pound's 7% decline since December.
Erik F. Nielson, chief European economist at Goldman Sachs, said that "people are very bearish on the UK, probably more than they should be. The Euro is clearly in its biggest crisis since it started, so it's kind of strange that it's overvalued." The Pound dropped to the support at 1.10 versus the Euro last night and break below this level could spark a move towards 1.0750.
The Pound posted its third weekly decline against the Euro and the U.S Dollar on March 5th, as opinion polls stoked concern that the UK may elect a minority government, hampering efforts to rein in the budget deficit. National elections must be held by June and at more than 12% of gross domestic product, the UK budget gap is on a par with that of Greece.
The UK economy exited the recession in the fourth quarter, expanding just 0.3%, while inflation accelerated to the fastest pace in 14-months to 3.5% in January. Nielson added, "we think the UK will outperform the Euro-zone in growth terms. We have a constructive forecast for Sterling." Goldman Sachs forecast that the Pound will rise to $1.73 in six months.
Euro / US Dollar
The Euro struggled to hold on to recent gains against the Dollar yesterday, after the Greek Prime Minister George Papandreou said that the nation's fiscal crisis could spread beyond Europe unless "unprincipled speculators" are reined in. The Euro dipped to lows close to $1.36 against the Dollar during the U.S session before stabilising around $1.3625 at the close of trading last night.
The economic data with the Euro-region was largely mixed, as the Sentix business confidence index was slightly stronger-than-expected for March. There was also a surprising increase in German industrial orders but the overall market impact was muted. The improvement in risk appetite failed to sustain the initial optimism surrounding the Euro, as there were further downgrades for Portugal's main banks.
There were no major U.S economic data releases during the day and the Dollar gained support after the comments from the Greek Prime Minister. Former Federal Reserve Chairman Paul Volcker said that he was confident that the Euro would survive but the lack of a unified government to back up the ECB is a "structural crack".
Data Released 9th March
EU 09:30 - Sentix Investor Sentiment Index (March)
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Following on from last week, the Pound rose against the U.S Dollar on Thursday for the first time in six days, while the UK currency stood firm at the pivotal 1.10 support level versus the Euro, as reports indicated the economic recovery is gathering momentum, boosting the government's ability to tackle the budget deficit. Sterling strengthened against 14 out of the 16 most actively traded currencies, after Nationwide Building Society reported that consumer sentiment rose above expectations in February.
A separate report from the Chartered Institute of Purchasing and Supply showed that an index of UK services industries expanded at the fastest pace in three years last month, as the economy officially exited the longest recession on record. The UK economy expanded 0.3% in the revised estimate for the fourth quarter, largely driven by the improvement in services, which accounts for three quarters of output.
Alan Clarke, an economist at BNP Paribas SA, said that "financial and monetary conditions are extremely loose, helped by very low interest rates and the weakness of the Pound. These have clearly supported survey indicators such as the CIPS. In turn we expect this to be translated into robust gross domestic product growth for the first half."
Consumer confidence also increased last month, while a report earlier in the week showed that manufacturing activity held firm at the highest level in 15-years. The Bank of England last week held its £200 billion bond purchasing program and keep interest rates unchanged at a record low of 0.5%, as the MPC continue to adopt a wait and see policy.
The Pound has suffered widespread and sustained losses against all of the 16 most actively traded currencies last week, falling to a record low against the Australian Dollar, amid speculation that the general election will result in a minority government for the first time since 1974. The ruling Labour Party is narrowing the gap on the Conservatives' and the Pound is likely to struggle to stem the flow of losses in the build up to the May/June election.
Paul Robson, senior foreign exchange strategist at Royal Bank of Scotland Group Plc, said that "the pound has fallen an awfully long way in a short period of time, and the consumer confidence data provides a welcome positive. It may be time for people to square positions." The Pound rose 0.6% against the Dollar to $1.5065, up from $1.4971 on Tuesday.
The Pound's plunge represents the longest run of declines in 16 months, as the UK currency lost 7% against the U.S Dollar since the start of the year. Despite the modest consolidation yesterday, the UK currency is unlikely to continuing gaining momentum, as investors shun UK assets amid concern of a hung parliament and further quantitative easing.
According to former Treasury advisor Roger Bootle, an election resulting in a minority government may cause "mayhem" in UK currency and bond markets. "The morning after an election of that sort, then there would be mayhem in the markets. It would be a very uncomfortable ride. We might go through many weeks, perhaps months, in which the markets couldn't be sure."
The Pound fell to the lowest level in 10 months against the Dollar to $1.4784 on Monday and Bottle added that there has been "an awful lot of hysteria" over the UK currency's decline and an exchange rate of $1.50 against the Dollar is probably "fair value". The UK's budget deficit is roughly the same as Greece's, both exceeding 12% of GDP and credit rating agencies have reiterated that the UK may test the boundaries of its Aaa rating.
The Pound held steady above $1.5050 against the Dollar, prior to the Bank of England interest rate announcement at midday on Thursday. The UK currency failed to hold on to the recent gains and approached the lowest level in 10 months, after the Central Bank kept UK interest rates unchanged at a record low of 0.5%.
The Monetary Policy Committee, led by the Governor Mervyn King, also kept the bond-purchasing program on hold for a second consecutive month, as policy makers assessed whether the £200 billion spent so far is enough to prevent the economy from slipping back into a recession. The result of the announcement was widely anticipated and Sterling made gains against the Euro, after the ECB President Trichet described the benchmark rate as "appropriate".
The European Central Bank also left interest rates unchanged at a record low yesterday of 1% and Trichet also phased out some emergency measures used to fight the financial crisis, sticking to his exit strategy even after Greece's widening budget deficit rocked the market. The Federal Reserve have raised the discount lending rate to 0.75% over the past month and will next convene on March 16th.
The Pound strengthened against the Dollar and the Euro on Friday, after reports showed that the U.S economy lost fewer hibs last month than expected, stoking optimism that the global economic recovery is gathering momentum. The U.S labour department said that employers eliminated 36,000 jobs in February, despite initial forecasts of a 68,000 reduction.
Euro / US Dollar
The Euro rose to its highest level against the Dollar in two weeks last week, after Greece announced spending cuts and tax increases, spurring speculation that the nation can rein in the European Union's largest budget deficit. There will, however, still be concerns over internal opposition to budget cuts and the mood of confidence may not last beyond the short-term.
The Euro failed to extend gains against the Dollar in European trading on Thursday, and weakened toward the $1.3650 region, ahead of the ECB interest rate announcement. The single currency fell from a two week high against the Dollar, after the central bank kept interest rates on at 1% and extend some stimulus measures to cement the economic recovery.
Lee Hardman, a currency strategist at Bank of Tokyo Mitsubishi UFJ Ltd, said "the ECB remains cautious, withdrawing emergency liquidity only gradually. The Euro is forming a near-term base here." Trichet also commented in the accompanying press conference that IMF support for Greece would not be appropriate and these remarks tended to renew concern over the debt situation.
The U.S jobless claims data was largely in line with initial estimates, recording a decline to 469,000, from a revised 498,000 the previous week. The pending home sales data was weaker than expected with a 7.6% decline, following a series of robust reports during the second half of 2009. The Euro has maintained a firm tone against the Dollar, as the French President Sarkozy pledged support for Greece.
Data Released 8th March
EU 09:30 - Sentix Investor Sentiment Index (March)
The Pound held steady above $1.5050 against the Dollar yesterday in the foreign exchange markets, prior to the Bank of England interest rate announcement at midday. The UK currency failed to hold on to the recent gains and approached the lowest level in 10 months, after the Central Bank kept UK interest rates unchanged at a record low of 0.5%.
The Monetary Policy Committee, led by the Governor Mervyn King, also kept the bond-purchasing program on hold for a second consecutive month, as policy makers assessed whether the £200 billion spent so far is enough to prevent the economy from slipping back into a recession. The result of the announcement was widely anticipated and Sterling made gains against the Euro, after the ECB President Trichet described the benchmark rate as "appropriate".
Mervyn King said last week that the economy faces a "gradual recovery" from the longest recession on record, and he pledged to aid the pickup by purchasing more bonds if required. Sterling has declined heavily in the build up to the BoE announcement yesterday, amid speculation of further quantitative easing and the prospect of a hung parliament.
The Pound fell to the lowest level against the Dollar since May earlier this week, amid concern that Britain's election will fail to produce a government strong enough to tackle the deficit, now more than 12% of gross domestic product. The ruling Labour Party have narrowed the Conservatives lead to just five percentage points. If repeated at the election, that would give Britain its first minority government since 1974.
The election due in May/June overshadowed yesterday's decision, as concern over whether the government can control a budget deficit equivalent to Greece's pushed the Pound to its worst losing streak since October 2008. The UK currency approached a 10-month low against the Dollar, trading down 0.4% on the day.
Philip Shaw, chief economist at Investec Securities, said that "they're waiting for the recovery to gain some traction and there has been some evidence that this is the case. As the economy gains momentum, it's more likely than not that the level of asset purchases has reached its peak." The BoE has yet to remove stimulus a year after it started buying assets with newly created money.
The European Central Bank also left interest rates unchanged at a record low yesterday of 1% and Trichet also phased out some emergency measures used to fight the financial crisis, sticking to his exit strategy even after Greece's widening budget deficit rocked the market. The Federal Reserve have raised the discount lending rate to 0.75% over the past month and will next convene on March 16th.
Paul Robinson, a currency strategist at Barclays Capital, said "there's still pressure on the downside for the Pound in the near-term against the Dollar. We don't expect the Bank of England to increase asset purchases." The UK currency has lost 8% against the Dollar this year, and reached $1.4784 on March 1st, the lowest level since May.
According to a report from Halifax yesterday, UK house prices dropped in February for the first time in eight months, as more people flooded the market with homes for sale. The average cost of a home in the UK fell 1.5% from January to £166,857 and the report adds to evidence that the housing market recovery may be losing momentum, after mortgage approvals dropped in January to an eight month low.
Euro / US Dollar
The Euro failed to extend gains against the Dollar in European trading yesterday, and weakened toward the $1.3650 region, ahead of the ECB interest rate announcement. The single currency fell from a two week high against the Dollar, after the central bank kept interest rates on at 1% and extend some stimulus measures to cement the economic recovery.
Lee Hardman, a currency strategist at Bank of Tokyo Mitsubishi UFJ Ltd, said "the ECB remains cautious, withdrawing emergency liquidity only gradually. The Euro is forming a near-term base here." Trichet also commented in the accompanying press conference that IMF support for Greece would not be appropriate and these remarks tended to renew concern over the debt situation.
The U.S jobless claims data was largely in line with initial estimates, recording a decline to 469,000, from a revised 498,000 the previous week. The pending home sales data was weaker than expected with a 7.6% decline, following a series of robust reports during the second half of 2009. The U.S non-farm payroll data will be watched closely today and there is certainly a risk that bad weather conditions will trigger a weaker result.
The Pound rose against the U.S Dollar yesterday for the first time in six days, while the UK currency stood firm at the pivotal 1.10 support level versus the Euro, as reports indicated the economic recovery is gathering momentum, boosting the government's ability to tackle the budget deficit. Sterling strengthened against 14 out of the 16 most actively traded currencies, after Nationwide Building Society reported that consumer sentiment rose above expectations in February.
A separate report from the Chartered Institute of Purchasing and Supply showed that an index of UK services industries expanded at the fastest pace in three years last month, as the economy officially exited the longest recession on record. The UK economy expanded 0.3% in the revised estimate for the fourth quarter, largely driven by the improvement in services, which accounts for three quarters of output.
David Noble, chief executive at CIPS, said in a statement yesterday that "the services sector is pretty much firing on all cylinders now. February saw business activity surge at its fastest rate in over three years as the sector helps to drive the UK economy further out of recession."
Alan Clarke, an economist at BNP Paribas SA, said that "financial and monetary conditions are extremely loose, helped by very low interest rates and the weakness of the Pound. These have clearly supported survey indicators such as the CIPS. In turn we expect this to be translated into robust gross domestic product growth for the first half."
Consumer confidence also increased last month, while a report earlier in the week showed that manufacturing activity held firm at the highest level in 15-years. The Bank of England will today hold its £200 billion bond purchasing program and keep interest rates unchanged at a record low of 0.5%, as the MPC continue to adopt a wait and see policy.
The Pound has suffered widespread and sustained losses against all of the 16 most actively traded currencies this week, falling to a record low against the Australian Dollar, amid speculation that the general election will result in a minority government for the first time since 1974. The ruling Labour Party is narrowing the gap on the Conservatives' and the Pound is likely to struggle to stem the flow of losses in the build up to the May/June election.
Paul Robson, senior foreign exchange strategist at Royal Bank of Scotland Group Plc, said that "the pound has fallen an awfully long way in a short period of time, and the consumer confidence data provides a welcome positive. It may be time for people to square positions." The Pound rose 0.6% against the Dollar to $1.5065, up from $1.4971 on Tuesday.
The Pound's plunge represents the longest run of declines in 16 months, as the UK currency lost 7% against the U.S Dollar since the start of the year. Despite the modest consolidation yesterday, the UK currency is unlikely to continuing gaining momentum, as investors shun UK assets amid concern of a hung parliament and further quantitative easing.
According to former Treasury advisor Roger Bootle, an election resulting in a minority government may cause "mayhem" in UK currency and bond markets. "The morning after an election of that sort, then there would be mayhem in the markets. It would be a very uncomfortable ride. We might go through many weeks, perhaps months, in which the markets couldn't be sure."
The Pound fell to the lowest level in 10 months against the Dollar to $1.4784 on Monday and Bootle added that there has been "an awful lot of hysteria" over the UK currency's decline and an exchange rate of $1.50 against the Dollar is probably "fair value". The UK's budget deficit is roughly the same as Greece's, both exceeding 12% of GDP and credit rating agencies have reiterated that the UK may test the boundaries of its Aaa rating.
UK stocks climbed for a fourth straight day yesterday, after Standard Chartered Plc rose 5.3% in London, after the UK bank, which makes more than 90% of pre-tax earnings in Asia, said full-year profit increased as company lending rose. The benchmark FTSE 100 Index gained 0.9% on the day and the increase in risk appetite is likely to support the higher-yielding currencies, such as the Australian Dollar and South African Rand.
Euro / US Dollar
The Euro rose to its highest level against the Dollar in two weeks yesterday, after Greece announced spending cuts and tax increases, spurring speculation that the nation can rein in the European Union's largest budget deficit. There will, however, still be concerns over internal opposition to budget cuts and the mood of confidence may not last beyond the short-term.
The European Central Bank governing council meeting will be heavily scrutinised this afternoon, as policy makers are expected to keep interest rates unchanged. The chairman Jean-Claude Trichet is due to deliver a statement after the announcement and any negative comments on the Greek situation will be watched closely.
The U.S Dollar fell against a basket of currencies, as commodities rallied, reducing the allure of the Dollar as a safe haven asset. The ADP employment report recorded a decline in private sector jobs of 20,000 for February, following a revised 60,000 decline for January and the report will provide an insight into non-farm payrolls released on Friday.
This dollar pegged unit took advantage of sterling's grotesque bout of weakness on Monday in the foreign currency markets, allowing the exchange rate to slide as low as 5.45 before a partial recovery set in. It was a weekend poll showing a high probability of a hung parliament that set the scene for things to come; markets do not like uncertainty, and at the moment the outcome of this election is as certain as a coin toss! Another contributor was Prudential's announcement that it will purchase AIG's Asian life insurance business. That will require the sale of a large amount of sterling to fund the $35bn price tag, most of which is to be paid in cash. Markets were also spooked by news items concerning Iran's failure to cooperate with nuclear watchdogs the IAEA. Given the negative sentiment surrounding the pound at present, any one of these stories could have caused the sell off.
Since Monday's lows we have spent two days in a consolidation phase, but ominously for sterling we are struggling to regain lost ground. Many investors are now wondering whether this is the start of a currency crisis. While it's probably too early to say that just now, the pound does look weak and highly vulnerable to further falls. The next noteworthy support is around 5.30. Buyers of the dirham should strongly consider hedging at least hald of any exposure at current levels.
Foreign Currency Market Update - Sterling / Canadian Dollar
Sterling had already broken the key support at 1.6250 last week (this was the October low) and then made a failed attempt to break back above that level at the end of the week in the foreign exchange markets. Things got dramatically worse on Monday as traders pointed to a myriad of factors that all added up to send sterling sharply lower, losing over four cents on the day. It was a weekend poll showing a high probability of a hung parliament that set the scene for things to come. Another contributor was Prudential's announcement that it will purchase AIG's Asian life insurance business. That will require the sale of a large amount of sterling to fund the $35bn price tag, most of which is to be paid in cash. Markets were also spooked by news items concerning Iran's failure to cooperate with nuclear watchdogs the IAEA. Given the negative sentiment surrounding the pound at present, any one of these stories could have caused the sell off.
The Canadian dollar remained firm, helped by a firm US currency and buoyant commodity prices. Since posting a low of 1.5400 on Monday we've spent two days consolidating close to this low. In fact, the market is showing so little "bounce" after Monday's dramatic slide that we are fearful of another imminent decline. Buyers of Canadian dollars should strongly consider covering at least half of any exposure now to reduce the risk of further downside.
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The foreign exchange outlook podcast from TorFX. Bringing you up to the minute currency market news.
