Continued Eurozone fears sees sterling hit two-month highs

Tom Tong04/Aug/2011Currency Updates

GBP

Sterling briefly hit a two-month high against the euro on Wednesday on concerns that the Eurozone debt crisis could spread to larger economies such as Spain and Italy. British service sector grew at the strongest pace in four months in July, easing concerns of an increasingly fragile growth amid weak domestic demand and high inflation, data from Markit Economics showed Wednesday. The headline Markit/Chartered Institute of Purchasing & Supply (CIPS) Purchasing Managers’ Index rose unexpectedly to 55.4 in July from 53.9 in June. Economists had expected the index to fall to 53.2.

Today sees the BoE Interest Rate decision at midday, however, despite a surprise rate cut in Switzerland the BoE are expected to keep rates on hold for the 29th month in a row at 0.5%. With this expected to stay until the first quarter of 2012 all eyes will be on the recently discussed round 2 of Quantative Easing in a hope to pump more money into SME business to get the economy rolling again.

USD

New orders for US manufactured goods declined in June, reversing the increase seen in May, according to figures released by the Commerce Department on Wednesday.

Factory orders were tallied at $440.7 billion in June, marking a decrease of $3.8 billion or 0.8% from May levels. The drop in orders followed a 0.6 percent increase in May.

Nonetheless, the drop in factory orders in June was not quite as steep as the 1.0% drop that most economists had anticipated.

A day after President Obama signed a bill raising the nation’s debt ceiling, Moody’s Investors Service on Tuesday confirmed the ‘AAA’ government bond rating of the United States. US private sector employment increased by more than expected in the month of July, according to a report released by Automatic Data Processing, Inc. (ADP). ADP said private sector employment increased by 114,000 jobs in the month. Economists had expected employment to increase to 100,000 jobs.

EUR

The single currency suffered generally on Wednesday. Eurozone private sector growth moved closer to stagnation in July as the rate of expansion in Germany and France slowed notably, while peripheries fell back into contraction. The composite output index that measures activity in both services and manufacturing sectors fell to a 22-month low of 51.1 from 53.3 in June, the latest survey from Markit Economics showed Wednesday. A score above 50 indicates expansion. Although it was above the flash estimate of 50.8, the final reading still was the lowest since September 2009.

The Eurozone continued to face threats to its stability from Spain and Italy. Italian government bonds hit its highest levels since 1997 on concerns that slowing growth will hamper efforts to control the nation’s debt, they hit 6.25% on Wednesday and if they creep up to 7% then we will be looking at a Greek style default but on a much larger magnitude. Spain is also creeping up towards that level. The only way out for Spain and Italy currently seems to convince the markets that they can control their debt by introducing massive government cuts and with support from the EU that they can afford to bail out two of their biggest economies. A bailout for Spain alone would be bigger than that of Portugal, Greece and Ireland combined.
Elsewhere

The franc declined against other major currencies in early European trading on Wednesday after the Swiss National Bank surprisingly reduced its interest rate to stem the currency’s rapid rise and said it will take further steps if necessary. They labelled the franc ‘massively undervalued’ at present. Additionally, the bank decided to considerably raise the supply of liquidity to the Swiss franc money market over the next few days.

The yen fell sharply against its major counterparts in Asian trading on Thursday after Japan intervened in the foreign exchange for the first time since March 18 to stem the yen’s recent surge against the dollar that threaten the nation’s economic recovery.

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Written by Tom Tong

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