Good morning and welcome to today’s foreign exchange market commentary on Friday, the 29th of June.
Yesterday’s economic report confirming the UK has slipped into a double-dip recession confirms what some economists have been long claiming; the economy is in terrible shape and showing no signs of recovery. And everyone from the Prime Minister to central bank Governor Mervyn King to every city economist has blamed the euro crisis for UK’s woes. It’s understandable for a central banker or a politician pushed to the corner. However, there’s only one problem. It’s hogwash!
UK’s problems are entirely home grown. And it can be solved at home as well. Unless the Brits start taking responsibility, there’s little hope that the stock market or the currency will recover.
It’s been four years since the meltdown struck, and the economy is barely breathing. With exports dropping 8.6 percent last month, trade deficit has widened than originally estimated. This is already the longest recession on record. It’s true that a major economic crisis unfolding at your door-step doesn’t particularly help. But that won’t explain how badly the UK is doing.
Take the case of Germany. It’s in the thick of the EU crisis. But Germany grew at 0.5 percent in the last quarter and is slated to grow by 1 percent in 2012. Not great, but better than the UK. Or take Sweden, or Norway. Both are on the borders of the single currency zone and should be hit as badly as London. However, Sweden grew by 0.8 percent last quarter and should grow by more than 1 percent this year. Norway should grow by 2.7 percent this year, a number that would be counted as boom in Britain.
So what went wrong? … to be followed on Monday.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2410
GBP/US$ – 1.5628
GBP/CHF – 1.4916
GBP/CAN$ – 1.6022
GBP/AUS$ – 1.5394
GBP/ZAR – 12.9788
GBP/JPY – 124.36
GBP/HKD – 12.1321
GBP/NZD – 1.9597
GBP/SEK – 10.896
EUR: The single currency experienced downward pressure on Thursday with the 17-member euro tumbling to a 3 week low against the greenback after a German official was quoted saying that the Brussels summit will not bring any detailed decisions. The softer than expected German employment data and the sharply higher yield at Italian debt auctions soured risk sentiments further. The common currency was further pressured as Spanish 10-year bond auctions traded at yields higher than the sustainable seven percent mark; ensuring cable remained well supported in the 1.2458-1.2521 range. However, the fortunes of the single currency changed in overnight trading with the EUR/USD surging by over 1.5 percent on news that the conditions on recently sanctioned loans to Spanish banks would be relaxed. The GBP/EUR also reversed its course, touching a one week low of 1.2362. Market focus would remain on the EU summit today as the GBP/EUR opens at 1.2428 this morning.
USD: The cable slipped to a two-week low of 1.5486 against the greenback yesterday in late afternoon trading as the final iteration of Q1 UK GDP confirmed the country has slipped into a double-dip recession while a separate report showed the current account deficit has widened more than anticipated. This understandably will strengthen the case of the dovish members for another round of QE when the BoE MPC members meet next week. However, the trigger for the Pound’s weakness came from elsewhere after a German official said the EU summit is unlikely to bring any detailed decision on the ongoing crisis, sending investors running for cover to the safe-haven JPY and USD. Sterling has been pushed higher overnight by a surging EUR/USD pair despite the latest Gfk NOP report revealing UK consumer confidence has hit the bottom in June. The GBP/USD opens at 1.5620 today morning.