The Pound declined against the Euro and the Dollar yesterday as the British economy continues to underperform. A report did show that British mortgage approvals unexpectedly increased in July after mortgage rates plunged to historic lows as investors sought the safety of British government bonds. Business confidence in England tumbled as well, dropping to a reading of -3 from 19 in the previous month when it shed 17 points.
The Dollar made gains against the Euro and the Pound as investors gauge the possibility of further measures from the Fed to ease monetary policy and stimulate the economy. In Fed Chairman Bernanke’s speech last Friday, the door for further stimulus was left open should economic conditions worsen in the coming months.
However, no explicit pledge of another round of quantitative easing was given, and QE3 remains highly improbable at this point with inflationary pressures likely to gain momentum as the hurricane season may drive up the price of oil.
However, forward looking economic data such as leading indicators and consumer confidence have fallen off track as of late. Consumer confidence was released this morning at 44.5 far short of the 52.0 expected, and down from 59.2 in the previous month. The confidence reading is the lowest since April 2009, the depths of the last recession, and marks the biggest point drop since October 2008, just weeks after the Lehman collapse.
Nevertheless, the dollar has remained relatively well supported against many of its counterparts ahead of minutes from the Fed’s last FOMC meeting at which three members abstained from voting all together. Bernanke’s options are likely limited not only by high inflation and stagnant growth, but also by shrinking support for extraordinary measures from within the Fed itself. Abstention from stimulus would be supportive for the dollar, but the possible resulting downturn in economic output and rise in unemployment could prove to be more damaging in the longer term.
The Euro made gains against the Pound while declining against the Dollar on growing speculation that the ECB will halt interest rate hikes as the region’s debt crisis curbs economic growth. ECB President Trichet told reporters yesterday that the Bank is reviewing its assessment of inflation risks, and a report today showed that Eurozone economic confidence fell by the most since December 2008 as the region’s economies teeter on the brink of a double-dip recession. Nevertheless, the EUR remains range-bound between 1.43 and 1.45, its range for much of the summer, as investors still seem to expect another round of stimulus from the Fed in some form or another.
Data released 31.08.2011
EU 10.00 Flash HICP (August)
EU 10.00 Unemployment (July)
US 13.15 ADP Employment (August)
US 14.45 Chicago PMI (August)
US 15.00 Factory Orders (July