The pound strengthened against the euro yesterday, as investor wariness over what the ECB intends to do at their next policy meeting on May 7th reduced appetite for the single currency. Early in the day the pound weakened against the euro, despite news over the weekend that Spain’s unemployment rate had reached 17.4% at the end of March, double what it was this time last year. Investors appeared more wary of the dire state of the UK’s public finances early on, particularly as it was revealed on Friday that the British economy shrank by a worse-than-expected 1.9% for the first three months of 2009. As a result, increased investor scepticism over UK Chancellor Alistair Darling’s optimistic growth forecasts announced in the budget last week, as well as the country’s ability to service its ballooning public debt, led many to dump sterling in early trading and look elsewhere. This initial strengthening of the single currency came despite worse-than-expected figures released by Destatis in Germany that Year-on-Year Import Price Index for March had fallen by 7.1%. Soon after lunch, however, sterling rallied against the euro, despite news of a drop in the number of mortgages approved in March. Figures released by the British Bankers’ Association showed the number of mortgages approved by the UK’s major banks fell to 26,097 in March, 47% down from the same time last year. The drop was the first in four months, fuelling fears among investors that a UK housing market recovery may still be some way off.
Nevertheless, despite this news sterling strengthened against the euro in afternoon trading as investors looked warily ahead to the European Central Bank’s next monetary policy meeting on May 7th. It now appears increasingly likely that the bank will cut interest rates by a further 25 basis points to 1%, but what is less clear is whether the central bank intends to copy the Fed and Bank of England by implementing a quantitative easing program to help boost the recession-hit eurozone economy. The euro finished the day down at 1.1231 from 1.1082.
In early trading today, the pound has weakened against the euro as fears over the extent of the swine flu outbreak continue. Yesterday, global equity markets were hit as investors dumped travel stocks on the basis that a possible pandemic would reduce global travel. The knock-on effect of a widespread outbreak could have devastating effects on the global economy, with some economists estimating that the world could lose $3 trillion in lost output. With the UK economy so dependent on banking and the financial services, this could have devastating effects on the country’s economic recovery, and therefore investors may start to look beyond sterling in the coming days to reduce risk. There are no major announcements in the UK or eurozone today, however many will be following news of the swine flu outbreak to see if it gets any worse.
Tuesday 28 April 2009
Pound weakens as investors seek safe-haven of the US dollar
The pound weakened slightly against the dollar yesterday following fears that an outbreak of swine flu in Mexico could turn into a global pandemic. As a result, investors took pre-emptive action by dumping travel and leisure stocks, with British Airways share price finishing the day down 7.4%, whilst travel group Thomas Cook lost 4.3%. Top economists fear that in the worst case scenario, a swine flu pandemic could cost the world economy $3 trillion in lost output, equivalent to 4.8% of world GDP, significantly hampering a global economic recovery. As a result, investors dumped sterling in favour of the perceived safety of the greenback in order to reduce their exposure.
In early trading, sterling lost ground against the dollar as concerns surrounding the UK’s ballooning debt and struggling economy continued. As revealed on Friday, the British economy shrank by 1.9% in the first three months of 2009, the biggest fall since the third quarter of 1979 and much worse than the 1.5% contraction analysts predicted. The figure cast fresh doubt over Chancellor Alistair Darling’s growth forecasts announced in his budget last Wednesday, predicting an optimistic 1.25% growth next year and 3.5% in 2011. In addition, Mr. Darling’s announcement that the UK will run a budget deficit of 12.4% of GDP for the coming fiscal year, as well as issue a record £220 billion of gilts, has continued to weigh on investors’ mind and, as a result, they have looked to the perceived safe-haven of the dollar to reduce risk. Later in the day, news that there were suspected cases of swine flu in the UK, Canada and elsewhere further exacerbated this flight to safety. Moreover, property data company Hometrack’s monthly report for April did little to cheer investors, as it confirmed house prices in England and Wales fell by 10.1% compared with a year ago, a modest improvement on the 10.3% fall in March. Although the markets largely shrugged off this data, it no doubt contributed to the weakening of the pound against the dollar as again investors looked to the perceived safety of the greenback to reduce risk.
Investor risk aversion also increased following comments by Lawrence Summers, director of the White House National Economic Council, who said the US economy will experience “sharp declines in employment for quite some time this year,” on Sunday night’s Fox News Sunday. His assessment came just two days before a crucial report in the US is due, which analysts expect to show a 4.7% contraction in the world’s largest economy in the first quarter of 2009. There was also further disappointing news in the UK property market later in the day, as a Mortgage Approvals report released by the British Bankers’ Association (BBA) showed the first drop in mortgage lending by the country’s major banks for four months in March. The number of mortgages approved for house purchases last month fell 6.8% from February to 26,097, although the BBA did say they expected fluctuations during a recession. Nevertheless, more negative news from the housing market did little to improve investor confidence that it may be on the cusp of a recovery, and together with concerns over the severity of the swine flu outbreak and the other data released throughout the day, the news caused sterling to weaken against the dollar, finishing the day at $1.4646.
There is an important Consumer Confidence survey due in the US today at 15.00 BST, however all eyes are likely to be on the swine flu story today to see if there are any more confirmed cases.
In early trading, sterling lost ground against the dollar as concerns surrounding the UK’s ballooning debt and struggling economy continued. As revealed on Friday, the British economy shrank by 1.9% in the first three months of 2009, the biggest fall since the third quarter of 1979 and much worse than the 1.5% contraction analysts predicted. The figure cast fresh doubt over Chancellor Alistair Darling’s growth forecasts announced in his budget last Wednesday, predicting an optimistic 1.25% growth next year and 3.5% in 2011. In addition, Mr. Darling’s announcement that the UK will run a budget deficit of 12.4% of GDP for the coming fiscal year, as well as issue a record £220 billion of gilts, has continued to weigh on investors’ mind and, as a result, they have looked to the perceived safe-haven of the dollar to reduce risk. Later in the day, news that there were suspected cases of swine flu in the UK, Canada and elsewhere further exacerbated this flight to safety. Moreover, property data company Hometrack’s monthly report for April did little to cheer investors, as it confirmed house prices in England and Wales fell by 10.1% compared with a year ago, a modest improvement on the 10.3% fall in March. Although the markets largely shrugged off this data, it no doubt contributed to the weakening of the pound against the dollar as again investors looked to the perceived safety of the greenback to reduce risk.
Investor risk aversion also increased following comments by Lawrence Summers, director of the White House National Economic Council, who said the US economy will experience “sharp declines in employment for quite some time this year,” on Sunday night’s Fox News Sunday. His assessment came just two days before a crucial report in the US is due, which analysts expect to show a 4.7% contraction in the world’s largest economy in the first quarter of 2009. There was also further disappointing news in the UK property market later in the day, as a Mortgage Approvals report released by the British Bankers’ Association (BBA) showed the first drop in mortgage lending by the country’s major banks for four months in March. The number of mortgages approved for house purchases last month fell 6.8% from February to 26,097, although the BBA did say they expected fluctuations during a recession. Nevertheless, more negative news from the housing market did little to improve investor confidence that it may be on the cusp of a recovery, and together with concerns over the severity of the swine flu outbreak and the other data released throughout the day, the news caused sterling to weaken against the dollar, finishing the day at $1.4646.
There is an important Consumer Confidence survey due in the US today at 15.00 BST, however all eyes are likely to be on the swine flu story today to see if there are any more confirmed cases.
Euro loses ground to the US dollar
The euro weakened against the US dollar yesterday as investors flocked to the safe haven of the dollar, predominantly due to fears arising over the global outbreak of swine flu. World health officials said yesterday that the virus was suspected in up to149 deaths in Mexico, with more than 1,600 cases reported, while 50 cases — none fatal — were confirmed in the United States, six in Canada and several in Europe, including 2 in the UK.
Shares in travel companies were worst hit by the outbreak of swine flu, with Thomas Cook, TUI, British Airways, Intercontinental and Carnival all trading sharply lower on fears that travel plans will be affected by concerns of the epidemic becoming a pandemic. But London fought back from early swine flu-related losses to track Wall Street higher on hopes a new restructuring plan from GM will help it avoid bankruptcy. However, worries have arisen that automaker Chrysler could be filing for bankruptcy if it does not agree a deal with Fiat by April 30.
Data released in the eurozone yesterday saw the German May GfK consumer sentiment index remain steady at 2.5, but riskier currencies came under pressure because of media reports about the extent of the toxic asset problem in German banks, and growing attention on public debt in countries such as the UK.
Investors are now eagerly awaiting the final outcome of the US Federal Reserve’s meeting taking place today and tomorrow, as well as quarterly earnings released by major banks. Investors also await the outcome of stress tests for US banks, scheduled to be announced next week. The tests involve a capital buffer to assist banks in overcoming a 3.3% economic contraction in 2009. Additionally, the ECB will be announcing their interest rate decision on May 7 where they are expected to cut interest rates by 25 basis points and possibly announce quantitative easing measures to combat the recession.
There are several announcements taking place in the US today, including S&P/Case-Shiller Home Price Indices, Consumer Confidence, Richmond Fed Manufacturing Index and ABC/Washington Post Consumer Confidence. There are no significant announcements taking place in the euro zone today.
Shares in travel companies were worst hit by the outbreak of swine flu, with Thomas Cook, TUI, British Airways, Intercontinental and Carnival all trading sharply lower on fears that travel plans will be affected by concerns of the epidemic becoming a pandemic. But London fought back from early swine flu-related losses to track Wall Street higher on hopes a new restructuring plan from GM will help it avoid bankruptcy. However, worries have arisen that automaker Chrysler could be filing for bankruptcy if it does not agree a deal with Fiat by April 30.
Data released in the eurozone yesterday saw the German May GfK consumer sentiment index remain steady at 2.5, but riskier currencies came under pressure because of media reports about the extent of the toxic asset problem in German banks, and growing attention on public debt in countries such as the UK.
Investors are now eagerly awaiting the final outcome of the US Federal Reserve’s meeting taking place today and tomorrow, as well as quarterly earnings released by major banks. Investors also await the outcome of stress tests for US banks, scheduled to be announced next week. The tests involve a capital buffer to assist banks in overcoming a 3.3% economic contraction in 2009. Additionally, the ECB will be announcing their interest rate decision on May 7 where they are expected to cut interest rates by 25 basis points and possibly announce quantitative easing measures to combat the recession.
There are several announcements taking place in the US today, including S&P/Case-Shiller Home Price Indices, Consumer Confidence, Richmond Fed Manufacturing Index and ABC/Washington Post Consumer Confidence. There are no significant announcements taking place in the euro zone today.
New Zealand dollar has mixed day
The New Zealand dollar had a mixed day, gaining ground against the aussie but losing some ground to the pound. The Swine flu pandemic dominated trading overnight. Markets will continue to remain focused on Thursday’s Reserve Bank of New Zealand rate decision, with investors expecting a 50 basis point rate cut. The central bank’s statement will also be eyed for clues on how long interest rates will remain at a low level.
Australian dollar undermined by fears over swine flu
The Australian dollar weakened against sterling yesterday, as fears the swine flu virus may spread globally saw yet another threat which could hinder a world economic recovery. The aussie relies heavily on commodities for its export income and usually remains vulnerable to possible threats to world trade. The flu virus caused higher risk aversion, which has generally overridden economic data. UK figures released revealed house prices in the UK fell by 10.1 percent in April compared to 12 month ago.
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