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The Pound dropped against 15 out of the 16 most actively traded currencies yesterday in the foreign exchange markets, approaching the lowest level since May versus the U.S Dollar, amid reports that the recovery in the UK property market may be losing momentum. According to the data from the Royal Institution of Chartered Surveyors, the number of real-estate agents saying that house prices rose exceeded those reporting declines by just 17 percentage points.
Economists had expected a 30-point gap and the Pound dipped under the pivotal resistance level at $1.5000, after Fitch Ratings analysts Paul Rawkins and Chris Pryce said that the UK needs to make a stronger fiscal adjustment to help reduce the budget deficit. They recommended that the UK should reduce the deficit from 12% to 3% of gross domestic product by 2014-15.
Paul Robinson, a currency strategist at Barclays Plc, said that "the RICS housing data weighed on sterling. The Moody's report about UK banks was also deemed to be sterling negative." The UK currency weakened 0.7% against the Dollar to $1.4965 at the close of trading last night. It reached a low of $1.4784 on March 1st, the lowest level since May.
There has been constant speculation surrounding a downgrade in the UK credit rating. Moody's Investors Service said in a report yesterday that UK banks and lenders that haven't improved their funding position may have their credit rating cut, as government support for the industry is withdrawn.
A separate report from the Office of National Statistics showed that the UK trade deficit unexpectedly widened in January by the most in 17-months, led by a overall slump in exports. The gap in goods and services was £8 billion, the most since August 2008, as imports fell 1.6% and exports slumped 6.9%.
Bank of England policy maker Kate Barker said earlier this week that the UK economy has shown a "disappointing" response to the weakness of the Pound, which has fallen about a quarter in value over the past three years on a trade weighted basis. BoE officials have reiterated that they want gross domestic product to rely more on exporting, as the economy recovers from the worst recession on record.
Alan Clarke, an economist at BNP Paribas SA, said that "it gets the first quarter of 2010 off to a poor start. We had anticipated a long wait for the effects of the weaker Pound to feed through into stronger exports, and that is exactly what we're having. Overall, disappointing from the perspective of growth."
Euro / US Dollar
The Euro failed to make any headway against the Dollar yesterday and there was a renewed test of support close to the $1.36 level. The single currency endured further selling pressure during the European session with a low close to 1.3535, amid a fundamental lack of confidence in the Euro-zone economy.
There are concerns that the tensions engulfing Greece will spread to Portugal and Spain, bringing the economic recovery in the region to a grinding halt. Fitch Ratings Agency expressed caution over the medium-term outlook for Greece, while there was also evidence of increased tensions within the Greek government on plans for budget cuts.
The latest U.S consumer confidence index was generally weaker-than-expected and the overall mood of risk aversion continued to support the Dollar. There are no major U.S data releases until Thursday and the U.S currency has been unable to draw support on yield grounds. However, there will still be expectations that the U.S will out-perform the Euro-zone over the coming months, which will tend to underpin Dollar sentiment.
Data Released 10th March
U.K 09:30 - Industrial Production (January) - Manufacturing
U.K 15:00 - NIESR GDP Estimate (3 Mths to February)
Foreign Currency Market Update - Sterling / US Dollar
A successful government gilt auction helped sterling recovery its poise last Tuesday after a Monday which saw the currency slide over four cents against the dollar. The fact that investors are still happy to buy gilts (most of the demand was from pension funds and insurance companies) is reassuring, especially as buyers were bidding for twice the amount of stock than was on offer. That level of cover contrasts well with the March 2009 auction in which the government only sold £1.63bn of a £1.75bn offer, the first auction failure in 14 years. Another auction for £3bn of 2022 debt went well yesterday, achieving 2.01 times cover, but this was eclipsed by two other news items. Firstly the latest international trade figures which showed Britain's trade deficit reaching £8bn in January, far higher than analyst expectations. This comes despite the weak pound, which should boost demand for British exports. That demand is crimped however by the weak state of the European economy, out main trading partner. This was the sharpest fall in exports since 2006.
Another blow came in the form of a report from credit ratings agency Fitch, who yesterday labelled Labour's promise to cut the deficit in half by 2015 as "too slow". This sort of report only helps to recycle the persistent speculation of a possible cut in the UK's credit rating; and is very unhelpful to an already embattled pound.
The technical outlook remains negative. Last week's recovery looks like a correction, with new lows likely to be round the corner unless we have some positive newsflow to help underpin sterling. Memories of last Monday's dramatic "collapse" are still fresh, and as we drift back towards last week's lows investors may become nervous and skittish. Buyers of the US dollar should strongly consider covering any requirement now in order to remove the risk of a new sell off.
A successful government gilt auction helped sterling recovery its poise last Tuesday after a Monday which saw the currency slide over two cents against the Euro. The fact that investors are still happy to buy gilts (most of the demand was from pension funds and insurance companies) is reassuring, especially as buyers were bidding for twice the amount of stock than was on offer. That level of cover contrasts well with the March 2009 auction in which the government only sold £1.63bn of a £1.75bn offer, the first auction failure in 14 years. Another auction for £3bn of 2022 debt went well yesterday, achieving 2.01 times cover, but this was eclipsed by two other news items. Firstly the latest international trade figures which showed Britain's trade deficit reaching £8bn in January, far higher than analyst expectations. This comes despite the weak pound, which should boost demand for British exports. That demand is crimped however by the weak state of the European economy, out main trading partner. This was the sharpest fall in exports since 2006.
Another blow came in the form of a report from credit ratings agency Fitch, who yesterday labelled Labour's promise to cut the deficit in half by 2015 as "too slow". This sort of report only helps to recycle the persistent speculation of a possible cut in the UK's credit rating; and is very unhelpful to an already embattled pound.
The technical outlook for sterling is still very precarious. The recovery off last week's lows looks like a correction, with new lows likely to be just around the corner. Memories of last Monday's "collapse" are still fresh, and as we head back towards those lows investors could become nervous and skittish. Buyers of the Euro should cover any requirement now to avoid the risk of a new sell off.
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)
The foreign exchange outlook podcast from TorFX. Bringing you up to the minute currency market news.
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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 foreign exchange outlook podcast from TorFX. Bringing you up to the minute currency market news.
