Daily Update On The Foreign Exchange Markets 09/06/09
Posted: Tuesday, June 09, 2009
by Phil Bennetts
Foreign Exchange Explained
GBPEUR/GBPUSD
The Pound maintained a generally weaker tone in Europe yesterday, dropping to lows close to $1.5800 against the Dollar, the lowest level in more than a week. The Prime Minister Gordon Brown confronted fresh attempts to oust him following a defeat for the Labour Party in the European Union parliamentary elections.
There was also further downward pressure on the Pound following reports that the Irish credit-rating had been downgraded, which tended to revive fears over the UK debt position and concerns over the potential for a medium-term UK downgrading. The Pound also declined against the Euro and the Japanese Yen, after former MPC member David Blanchflower said that the Bank of England may expand its asset insurance program.
The Central Bank have been buying assets with newly created money as the economy contracts at the fastest pace since 1979 and Blanchflower said that policy makers may expand quantitative easing measures if the economy keeps shrinking. The Bank may seek to spend more that the 150 billion authorized by the Treasury, as well as buying different types of bonds.
Blanchflower also said that the UK economy will remain entrenched in a recession for another year, despite the positive tone of UK fundamentals. The Monetary Policy Committee entered its fourth month of money printing last week and emphasised its commitment to spend 125 billion. Blanchflower also warned that the biggest concern is still that the steepest recession since the Second World War will cause an extended drop in consumer prices, stoking deflationary pressures.
The Bank of England said last month that the inflation rate will probably drop to around 0.4% by the end of this year and will reach only 1.2% in the middle of 2011. The Central Bank has so far bolstered money supply by purchasing 77 billion in government bonds and added 2.1 billion in commercial paper.
Barclays Plc has recently raised its forecast for UK gross domestic product on June 4th, after a report showed that service industries unexpectedly grew for the first time in a year. The UK economy will stop contracting in the third quarter of this year but Blanchflower said, "I'd be surprised to see a positive quarter of growth in 2009. Expansion probably won't resume until the second quarter of 2010. Certainly the labour market is going to be pretty terrible for quite a long time"
The Pound also came under pressure in early Europe as UK stocks fell for the first time in three days, amid speculation that a 26% rally in the FTSE 100 Index has outpaced expectations for earnings and economic growth. Lloyds Banking Group Plc slumped 7.7%, after selling shares to repay government funds.
The Pound has suffered its biggest weekly decline against the Dollar in three months last week, as six government ministers resigned and Labour lost 291 seats of the 469 they held before the UK local elections. However, the UK currency secured some support at lower levels with a significant correction back towards $1.6050 against the Dollar by the close of trading last night.
The Pound also gained some respite from an an easing of immediate political tensions, as the challenge to the Prime Minister faded with his supporters saying that his resignation would be electoral suicide. The UK currency gained ground against the Euro with a move towards 1.15 and the Pound has held steady this morning as the RICS House Price Balance showed that less than half of estate agents recorded lower prices in May.
According to a report from the Nationwide Building Society last week, consumer demand rose by more than expected in May, while UK service industries grew and house prices unexpectedly rose 2.6% in April. Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd, said that "recent data in the UK surprising to the upside. That has led to expectations a recovery is imminent, and consequently the market started pricing in a 25 basis point rate increase as early as 2010."
EUR/USD
The Euro rallied against the Dollar from the lowest level in week yesterday but the single currency was unable to recapture the $1.4000 level, dipping to lows near 1.3800 in early Europe. The Euro was unsettled by structural factors during the course of the day, as there were further uncertainties over the Baltic economies.
The speculation that there will be substantial currency devaluations will increase concerns over losses with the European banking sector and this would tend to undermine the Euro. In addition, the downward pressure on the single currency intensified after a second downgrading of the Irish credit rating. In terms of economic data, an improvement in business confidence and a no change for German factory orders failed to have any major impact.
The Dollar looked to gain support from higher bond yields and speculation that the Federal Reserve could raise interest rates before the end of 2009. Losses in the Dollar were tempered as investors raised bets that the Federal Reserve will increase its target lending rate by the end of the year, as the U.S economy recovers.
Data Released 9th June
U.K 00:01 BRC Retail Sales (May)
U.K 00:01 RICS House Price Balance (May)
U.K 09:30 DCLG House Prices (April)
GER 11:00 Industrial Production (April)
U.S 15:00 Wholesale Inventories (April)
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