Pound undermined by outbreak of swine flu

A deadly outbreak of swine flu has killed more than 100 people in Mexico, with infections reported in the US, Canada and possibly six other countries. Uncertainty over the scale of the outbreak has cranked up risk aversion, hitting higher-yield currencies like the euro and sterling, whilst at the same time boosting the dollar and the yen as a safe-haven play. Global equity markets have also been affected by the outbreak this morning, with airline, holiday and leisure stocks all taking a particular hit. It would appear that only once the extent of the outbreak is known, or authorities start to bring it under control, will investor jitters on this issue subside.

Pound loses ground to euro following worse than expected GDP

The pound weakened against the euro on Friday, as improved investor confidence in the eurozone increased appetite for the single currency. In Germany, the IFO Business Climate index survey showed a better-than-expected rise to 83.7 in April, up from 82.2 the previous month, fuelling investor confidence that the eurozone may be coming tentatively out of recession. In the UK, GDP figures released by the Office of National Statistics showing that the economy had shrunk by 1.9% in the first quarter of 2009 further called into question Chancellor Alistair Darling’s optimistic growth forecasts, announced in his budget last Wednesday. The Chancellor predicted that the UK economy would grow by 1.25% next year and 3.5% in 2011, but the worse-than-expected GDP data cast fresh doubt over his predictions. It represented the biggest quarterly decline in the UK’s GDP in thirty years, and the country’s third consecutive quarter of negative growth, prompting investors to dump sterling as their confidence that the UK may be coming out of recession dwindled. There was also continued doubt in the City over the credibility of the Chancellor’s new 50% tax rate on those earning £150,000 or more, with many fearing that the top financial services talent will look elsewhere to ply their trade. With the UK economy so dependent on the banking and financial services industry, some analysts worried over the long-term implications of such a tax rise, potentially making it much harder for the UK to get out of recession going forward. As a result of these investor jitters, together with improved investor sentiment in the eurozone, sterling weakened against the single currency over the day, finishing at 1.1082, down from 1.1198 at the start of the session.

In early trading today, the pound has continued to weaken against the euro ahead of important housing data released later today. The Nationwide Housing Price figures are expected to report a further 15.8% fall Year-on-Year for April, fuelling fears that the UK housing market may have some way to go before it bottoms out. In the eurozone, President of the European Central Bank Jean Claude Trichet’s speech at 17.45 BST will be of particular importance to investors as he may give some indication of what steps the bank intends to take at the next meeting.

Pound undermined by worse than expected GDP figures

The pound weakened against the dollar on Friday, wiping out much of the bounce it enjoyed the day before. In early trading, the pound lost ground against the dollar following an article in The Daily Telegraph suggesting the UK could lose its AAA credit rating after rating agencies outlined their concerns over the UK’s ability to service its public debt. If the UK were to suffer the embarrassment of having its rating downgraded the cost of sovereign borrowing would increase, making future tax and interest rate rises more likely. The pound then suffered furthered losses against the greenback after figures released by the Office of National Statistics showed the UK economy had shrunk 1.9% in the first three months of 2009. The figure was much worse than the 1.5% contraction analysts had predicted, and represented the biggest decline in GDP since the third quarter of 1979. It was the UK’s third consecutive quarter of negative GDP growth, confirming that the country remains mired in deep recession. The worse-than-expected figures cast fresh doubt over UK Chancellor Alistair Darling’s optimistic growth forecasts announced in the budget last Wednesday, and therefore many investors sold sterling in favour of the perceived safe-haven of the US dollar.

Later in the day, however, better-than-expected US Durable Goods Orders data, down at -0.8% rather than the predicted -1.4%, sparked a rally for the pound as investors’ appetite for risk improved. The pound’s recovery was also aided by overseas central banks and model funds buying into the currency as part of their regular reserves management. However, worse-than-expected housing data eventually cancelled out sterling’s gains as investors realised the US economy may yet have further to contract. Month-on-month New Home data released by the US Census Bureau revealed that sales of single-family homes in March decreased by 0.6% to a seasonally adjusted annual rate of 356,000 in comparison to February. The decline was the fifth in six months and added to investor wariness that the all-important US housing market may yet have further to fall. This news, together with other data released during the day, meant the pound finished down against the dollar at $1.4676, having started the day at $1.4721.

In early trading today, the pound has weakened markedly against the dollar as investors brace themselves ahead of the release of important UK Nationwide House Price data, expected to show a fall of 15.8% Year-on-Year for April. There are no major announcements in the US today.

Euro continues its rise against the US dollar

The euro continued its rise against the dollar on Friday, finishing at $1.3240 up from $1.3142 at the start of the day. In early trading, the euro rose against the dollar after a key survey of German business confidence indicated tentative signs of recovery in the eurozone economy. April’s IFO Business Climate index survey showed a rise to 83.7 from 82.2 the previous month, much higher than the 82.3 analysts expected. As a result, investor risk aversion weakened and they bought into the euro, taking it to a one-week high against the greenback. This shift in favour of the single currency was also aided by the announcement that French consumer spending for April was stronger than expected. In the US, ongoing concerns over government stress tests on US banks further contributed to the euro’s gains over the dollar, as investor jitters over whether there may be further bad news to come weighed on their minds.

Interestingly, Ford’s admission that they had lost $1.43bn in the first quarter of 2009 did little to dissuade investors from buying into riskier currencies, primarily because that was far less than the $7.2 billion the company had lost in the last three months of 2008. It is now targeting 2011 to break even. The dollar’s slide against the euro was further extended after better-than-expected data released by the US Census Bureau reduced investors’ risk aversion. Their Durable Goods Orders data for March stood at -0.8%, much higher than analysts had predicted, and therefore investors looked beyond the perceived safe-haven currencies. Worse-than-expected property data from the US did little to stem the euro’s gains, despite signs that the housing market continues to slow. New Home Sales in March were reported at -0.6%, far weaker than the 0.9% growth predicted by analysts.

In early trading today the euro has pared some of the gains it made last week, following news over the weekend that Spain’s unemployment rate hit 17.4% at the end of March, double this time last year. There is also wariness in the market ahead of the President of the European Central Bank’s speech at 17.45 BST today. Investor’s will be studying Jean Claude Trichet’s words carefully as they try to decipher what measures he intends to implement to get the eurozone out of recession. As a result, there has been a flight to the perceived safe-haven of the greenback this morning as investors look to reduce risk. There are no major announcements due in the US today.

New Zealand makes gains against the pound

The New Zealand dollar finished the week stronger against both sterling and the aussie, however offshore trading has seen the kiwi weaken and open lower against both. The Reserve Bank of New Zealand’s decision on Thursday will take centre stage this week, with markets predicting a 50 basis point cut.

Australian dollar makes substantial gains against sterling

The Australian dollar appreciated heavily against sterling on Friday, after data showed the UK economy’s fall in the first quarter was its fastest in 30 years. Britain’s first quarter gross domestic product fell 4.1% year on year, the biggest annual drop since 1979. The latest figures mean that GDP has now shrunk for three quarters in a row, and confirm that the economy is still deep in recession. Sterling also came under pressure after The Telegraph newspaper reported that ratings agencies were concerned about Britain’s rising debt levels. Earlier last week, the government said that the national debt would reach 1.4 trillion pounds during the next five years.