The Pound declined against the Euro while remaining relatively well supported against the Dollar yesterday. With no major economic data out of the UK so far this week, the GBP has largely been moving in step with the EUR and other European currencies as investors focus on the US economy. The pound has also found support in surging demand for British government bonds as investors seek their perceived safety with both the US and Eurozone struggling with debt and slowing growth. The yield on the 10-Yr fell to 2.24% late last week, the lowest since records have been kept, on the growing demand.
The Dollar is lower against nearly all of its major peers this morning as risk assets continue to recover from last week’s volatility. Weak economic data out of the US is also weighing on the dollar this morning, with both housing and manufacturing data falling short of forecasts. New home sales tumbled to a five-month low of 298K versus the expected reading of 310K, and worse than last month’s 312K. An index of manufacturing activity in the Richmond, VA area also disappointed, registering -10 after stagnating in the previous month, marking the worst reading in more than two years. Both reports reflect the overall slowdown in the US economy, much as it did at this time last year before Fed Chief Bernanke announced QE2. Coincidentally or not, Bernanke is set to meet with global central bankers later this week at an annual summit in Jackson Hole, WY, the same venue at which QE2 was first proposed. As such, investors appear to be optimistic that a QE3 program or another scheme to lower interest rates and encourage employment is forthcoming.
The dollar has largely been relegated to wide ranges over the past month, but this week’s meeting presents a potential turning point. Should Bernanke announce another round of quantitative easing or another scheme that would expand the Fed’s balance sheet, the dollar will likely come under renewed pressure against its counterparts. However, should Bernanke stick to his recent stance that conditions are not acceptable for QE3 (i.e. inflation is too high), it would likely result in a continued selloff in risk-assets, thus benefitting the dollar at least for the time being.
The Euro retested its recent highs against the Dollar yesterday, but has since pulled back, remaining within its summer ranges. The initial bounce came after an encouraging PMI report for the Eurozone, which remained steady at 51.1 versus an expected drop to 50.0 with both services and manufacturing advancing. However, the better than expected PMI reading has largely been offset by declining confidence in the region with both Eurozone consumer confidence (-16.6 vs -12.4 expected) and ZEW economic sentiment (-40.0 from -7.0 in the previous month) missing their forecasts. Ahead of this Friday’s meeting in Jackson Hole, the EUR will likely remain within its recent ranges.
Data released 24.08.2011
EU 10.00 Industrial Orders (June)
US 13.30 Durable Goods (July)