Currency Update – Wednesday 1st October
Another day, another bank in trouble; this time it is Dexia, a European bank, which has had to have been bailed out by the governments of Belgium, Luxemburg, and France. There are now clear signs that the banking crisis is spreading out from the US, meaning that the Dollar no longer has to bear the brunt of the markets worries. The panic that followed the rejection of the Economic Stability Bill by lower house of the US congress, gave way to optimism yesterday, as the government’s dire predictions of what will happen if the financial crisis is allowed to go unchecked, has reassured the markets that something will be done, with a revised bill likely to be passed by the end of the week, and even if the legislators don’t take action the central banks could step in to attempt to coordinate their actions, although what more they can do is open for question.
With the markets expecting something to be done by the US government by the end of the week, the stock markets recovered some of their losses, with the S&P500 rebounding 5.27%; the Asian markets never suffered as much as those in the west, and the FTSE also bounced slightly yesterday. With the Stock markets recovering, the sentiment on the Dollar has followed, helped along by quarter end position squaring, pushing Sterling down below 1.78, and the Euro below 1.41 against the Dollar. The Pound has now lost over 6c against the Dollar in just two days this week, and it seems that the trend of the strengthening Dollar, that was set up before the recent weeks banking crisis, is once again underway, however this is predicated on a bail out of the US banking system, if this doesn’t happen, or happens but doesn’t work, then the sentiment can swiftly reverse.
The Pound has slipped backwards against the Euro, below 1.26, after briefly spiking up above 1.27 yesterday as the news of the failing European bank shook the markets confidence. The prospects for the GBPEUR rate depends very much on the prospects of rate cuts in each economic centre. yesterday there were signs that the Eurozone CPI had peaked with the annual rate falling to 3.6%, still well above target, so a rate cut at tomorrow’s meeting is not very likely. In the UK, yesterday’s GDP figures came in slightly better than some expected showing the economy staying flat in the previous quarter; this still raises concerns over a recession, and the clamour for rate cuts by the MPC at the meeting next week has been rising.
In the UK today we have the Manufacturing Purchase Managers Index which is likely to rebound slightly from last months poor reading, but the measure is still going to stay at a level showing contraction that could continue for some time. We have the same, or similar, measures of manufacturing in the Eurozone and the US, both of which will follow the UK figures in showing a contraction in the industry, which leaves the currency markets once again at the mercy of market confidence and US politics.