Foreign Exchange: Pound Recovers Against Euro

Published: 6 July 2011 By Peter Thompson Leave a Comment

With some better than expected economic data yesterday the pound managed to recover from the 15 month low against the euro that it hit at the end of last week.

Foreign ExchangeThe pound rose on the back of better than expected CIPS Services Data – a welcome positive against an otherwise negative economic landscape as the government’s austerity measures along with volatile world markets put the pound under enormous pressure.

Even though the Markit/CIPS Business Activity Index for the British services industry registered an unexpected rise in June confidence levels retreated to their lowest since October 2010.

Chris Williamson, Markit’s own Chief Economist said “Private sector services activity rose at a marginally faster rate than May, but growth for the second quarter as a whole looks to have slowed from 0.8% in Q1 to 0.5%. Gross domestic product therefore could have risen by just 0.3% at best in Q2, down from 0.5% in the first three months of the year.”

The Halifax, part of Lloyds Banking Group, has today reported that the UK housing market is facing “considerable headwinds” despite prices rising slightly in June. The lender said that whilst low interest rates are maintaining stability in the housing market, low pay rises, higher taxes and inflation are all holding back demand from buyers.

The average home rose in price by 1.2% in June compared with May but this is countered by the fact that the typical home was 3.5% cheaper than a year earlier, costing £163,049.

Sovereign debt crisis concerns continue

The pound also continues to benefit from the after effects of Monday’s announcement by ratings agency Standard & Poor’s (S&P) that the current EU proposals to rescue Greece constitute a ‘selective default’.

France has proposed a voluntary rollover for 70% of Greek debt expiring from now until 2014 into a new 30-year bond issuance. International banks are to meet in Paris next Tuesday to discuss this.

Meanwhile, Standard & Poor’s warned that the plan would be considered a “selective default.” The credit rating agency explained that the plan offers “less value than the promise of the original securities.”

Ratings agency Fitch has indicated that although it will put a default issuer rating on Greece its rating on Greek bonds will stay above ‘default’.

The Financial Times reported that the European Central Bank (ECB) will continue to accept Greek debt as collateral for loans as long as the four main credit rating agencies do not all declare Greece to be in default.

And concern over the sovereign debt crisis doesn’t stop with Greece. Credit ratings agency Moody’s has downgraded Portugal’s debt to junk status, saying that there was a growing risk the country would need a second bail-out before it was ready to borrow money from financial markets again and that in a possible second bail-out, private lenders might have to contribute.

Portugal’s government said Moody’s had not taken into account the strong backing for austerity measures. It said that the programme of economic measures announced last week was “the only way to reverse the course and restore confidence” in Portugal.

Portugal, Greece and the Irish Republic have all received bail-outs in the last 14 months to give them time to repair their economies so they could borrow money normally again.

US Dollar

The US dollar weakened again as traders looked ahead to the end of week employment data from the US Labor Department. The expectation is that the US economy will not have added enough jobs to cut unemployment and therefore interest rates are likely to remain unchanged at 0% to 0.25% for some time to come.

The dollar index, a trade weighted measure of the US dollar against a basket of currencies was also down 0.2% emphasising the current low expectations for the world’s de-facto reserve currency.

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Any analysis and/or forecasts are provided to help understand market conditions and developing trends. Readers are wholly responsible for their own trading decisions.

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