Pound undermined against euro on poor economic outlook

The pound tumbled against the single currency yesterday after it was confirmed that UK unemployment had jumped by the largest margin on record and to a 12 year high, pointing towards a deepening recession. Economists are now expecting that unemployment may rise above the 3 million mark in 2010 as the UK’s economy continues to slow. The IMF also revised its economic outlook for many industrialised nations yesterday, with Japan and the UK facing negative growth in 2010 as well as this year. The eurozone is expected to remain fairly stagnant but crucially, and in contrast to the UK, it is not expected to contract next year.

The Bank of England also released their minutes yesterday, and it is expected that in addition to the £75bn that has already been created, the central bank will have to print more money to stave off an even deeper recession going forward. The decisions to cut interest rates by 0.5% and print more money were unanimous by the MPC.

The Confederation of British Industry release their industrial trends survey this morning, whilst there are no significant releases due from the eurozone today.

Dollar weakens on quantitative easing announcement

In Wednesday's trading the pound strengthened over the US dollar by 2.32 cents to close the day's trading at the 1.4268 level. Earlier in the day the pound had traded as low as 1.3849 after it was announced that unemployment in the UK had exceeded 2 million and investors took a poor view of the health of the UK economy. It was also reported that the number of unemployed claiming benefits shot up at the record rate of 138,400. However, the pound’s fortunes were reversed after it was announced in the US that the Fed would engage in quantitative easing in order to stimulate the economy. Using $300 billion, the Fed plans to buy long-dated treasuries in a bit to flood the credit market with dollars and encourage lending to the private sector. It will also use over $1 trillion to buy securities and debt from mortgage finance agencies. The dollar weakened as investors see the ever expanding US budget deficit as having long term negative effects.

In today's trading the pound has continued to strengthen on continued dollar selling after yesterday's announcement. The CBI Industrial Trends Survey due in the UK today will reveal expert projections on manufacturing costs, exports, and prices, while the BoE will report on the current sterling in circulation. In the US, the Philadelphia Fed Manufacturing Survey will be published, along with initial and continuing unemployment claims data.

US dollar falls to two-month low against euro

The dollar fell to a two month low against the euro as the Federal Reserve said it will purchase US$300 billion of longer-term Treasuries, increasing speculation that the central bank is debasing the currency. The dollar fell as much as 2.9% to US$1.3435 per euro, the biggest intraday decline since 17 December. The Federal Open Market Committee stated “to provide greater support to mortgage lending and housing markets, the committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage- backed securities. Moreover, to help improve conditions in private credit markets, the committee decided to purchase up to US$300 billion of longer-term Treasury securities over the next six months.”.

Fed Chairman Ben Bernanke is taking a new approach to monetary policy after it was announced that unemployment had risen to 8.1 percent and economists forecast the economy will shrink through the middle of the year. The Fed also kept the benchmark interest rate at between zero and 0.25 percent and said it will consider expanding the Term Asset-Backed Securities Loan Facility to include “other financial assets”.

There are no significant releases due from the eurozone today. In the US, Jobless Claims and the Philadelphia Fed Manufacturing Survey are due this afternoon.

Aussie hits six-week highs against sterling

The Australian dollar reached six week highs against sterling yesterday, after the US Federal Reserve surprised markets by offering to buy long term treasury bonds. The radical attempt to stimulate the world’s largest economy caused some optimism about reviving global growth, which would in turn increase demand for Australian commodity based exports. However, sterling continues to be punished by a raft of poor economic news. Employment figures revealed unemployment in the UK passed 2 million, reaching a 12 year high, while the number of people claiming jobless benefits in February jumped by the biggest amount since records began some 30 years ago.

Kiwi dollar report

The New Zealand dollar remained in recent ranges overnight as markets continue to digest the shock announcement by the US Federal Reserve. This is likely to put pressure on the greenback for the short term, which may help support the kiwi, provided people believe the plan may help stimulate the global economy in the longer term. However, investors are likely to remain cautious given that very little positive economic data is being released.