Royal Alliance Capital Currency Review

Doubts remain after EU summit

The euro fell to a 9-month low versus sterling on Thursday after the European Central Bank lowered interest rates from 1.25% to 1.00%. The Bank announced new measures to ease banking sector strains, but stopped short of further measures to stem the crisis in government debt markets.

This transferred the onus back to Europe’s politicians to formulate a viable plan to end the crisis, ahead of the EU leaders’ summit on Thursday and Friday. Standard & Poor’s, a credit rating agency, had also previously warned it might cut the ratings of 15 euro zone countries unless bold action was taken. Announced measures included tighter budget rules for euro members and the provision of up to €200 billion in loans to the International Monetary Fund to help tackle the crisis.

There were few domestic surprises to offer sterling direction. The Bank of England (BoE) opted to leave interest rates at 0.5% and made no changes to the scale of its quantitative easing (QE) asset purchases. Its current QE programme is scheduled to last a further two months. The National Institute of Economic and Social Research estimated the UK’s Gross Domestic Product grew by a subdued 0.3% in the three months to November, suggesting a rising likelihood the BoE might need to expand QE purchases during 2012.

With US economic announcements thin on the ground, the sterling/US dollar rate was buffeted by changes in investors’ moods, but lacked a clear direction. After the previous week’s encouraging non-farm payrolls jobs report, a fall in initial jobless claims to their lowest level since February added to optimism over the employment outlook. Service sector activity continued to expand in November, albeit at a slower-than-expected pace.

The Reserve Bank of New Zealand left interest rates at 2.5%. The accompanying statement suggested the central bank could take some time to decide its next move, but remains wary of a weakening outlook for global growth. Sterling briefly traded below NZ$2, although the New Zealand dollar fell versus the pound late on in the week as investor sentiment soured.

The South African rand, along with the Australian and Canadian dollars, also weakened versus sterling over the latter part of the week. Via their link with commodity prices, these currencies tend to be more sensitive to the global economic outlook. The Bank of Canada kept interest rates on hold at 1% as had been widely anticipated. Data gave mixed messages regarding Australia’s outlook; the latest GDP figures suggesting the economy remains in robust health, helped by the mining boom, whilst the latest employment figures disappointed.

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