Political tensions hurt euro
European political tensions again dominated headlines last week as the euro endured further losses against both the US dollar and sterling.
Greek Prime Minister, George Papandreou, called a referendum to seek
wider support for the new bailout package, despite having undertaken
protracted negotiations to agree its terms with other European leaders.
However, Papandreou later withdrew the plan for a referendum after
intense opposition.
The added uncertainties prompted the euro to fall to
intra-week lows of 1.1698 against the pound. Further political developments on Sunday saw the Greek Prime Minister
announce his imminent resignation as Greek political leaders sealed a
pact to form a national unity government.
The new coalition comes in an
effort to show that Greece is serious about taking the steps needed to
stave off bankruptcy. Concerns Italy could become further embroiled in
the crisis intensified on Monday morning, as fears grew over Italy's
political uncertainty ahead of a second vote on Tuesday regarding the
country's budget and a potential confidence vote on Prime Minister
Silvio Berlusconi.
In his first meeting as President of the European Central Bank (ECB),
Mario Draghi and the ECB council unexpectedly lowered interest rates
from 1.5% to 1.25%, compounding the euro’s woes. The
ECB's move reversed its decision to lift interest rates in July, at
which time the sterling/euro rate had fallen to lows below 1.12.
Although the pound has found it difficult to break through €1.17 in
recent months, this resistance level might be broken if the ECB decides
it has to cut rates further in the coming months.
A first estimate of UK Gross Domestic Product (GDP) indicated the UK
economy grew by 0.5% during the third quarter. This represented a bounce
in activity, after a second quarter performance which had been weighed
down by the early Easter timing and an extra public holiday for the
Royal wedding.
However, this meant the year-on-year growth rate was also
just 0.5%, which still points to a very subdued pace of recovery. A
third fall in manufacturing activity in four months in October
underpinned some pessimism over the outlook for the final quarter of
2011.
The US dollar lacked a clear direction against
sterling last week, generally following wider stock market trends and
changes in investors’ optimism levels. There were relatively few
domestic surprises for the currency.
The US Federal Reserve repeated its
commitment to keep interest rates close to zero until at least
mid-2013, although one Committee member wanted the central bank to take
further measures to stimulate the economy. The latest non-farm payrolls
jobs report fell slightly short of expectations, although revisions to
past data suggested the employment picture might not be quite as bleak
as previously thought.
The Australian dollar fell more than three cents
against sterling last week as the Reserve Bank of Australia (RBA)
lowered interest rates for the first time in more than two and a half
years. In a move to bolster the Australian economy, the RBA cut its key
interest rate to 4.5% as weaker global growth threatens to slow the
nation’s resource-driven economy.
The Japanese yen
carried on its recent decline amid rumours the Bank of Japan is
continuing to intervene to prevent its currency from appreciating
further. The Canadian dollar lost support versus the
pound as Canadian employment fell by 54,000 in October, contrary to the
15,000 rise expected by forecasters. Worse-than-expected employment data
in New Zealand saw the New Zealand dollar fall to intra-week lows of 2.035 versus sterling.
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