The UK economy still fragile as retail sales and housing data disappoint

Tom Tong07/Dec/2011Currency Updates

GPB

Sterling fell against the dollar yesterday. It was dragged down by the Euro – after rumours of a rating downgrade to the Euro zone bailout fund highlighted the problems faced by the country’s leaders if they cannot reach an agreement to solve the debt crisis later this week.

Sterling also fell against the Euro after strong Industrial orders date released in Germany contrasted with the weak data released in the UK yesterday. Weak retail sales and and housing market surveys have highlighted the fragile state of the UK economy.

S&P have also put the AAA rating of the European Financial Stability Facility on ‘negative’ watch- days before EU leaders meet to try and sort out the Euro zone debt crisis. This move by S&P follows warning that AAA rated Germany and France were at risk of cuts to their credit rating if they cannot show more fiscal discipline.

EUR

This morning in Asian trading, The euro remained firm versus the dollar on Wednesday as investors lessened their holdings of positions betting on a further decline in the common currency ahead of key events later in the week. However, yesterday, The euro rose against the majority of its 16 main counterparts amid speculation Europe will expand funds available to the region’s most-indebted nations as leaders prepare to meet in Brussels tomorrow.

The 17-nation euro snapped a three-day decline versus the yen after the Financial Times reported yesterday that Europe may combine temporary and planned permanent rescue facilities to bolster its bailout resources. The European Central Bank is forecast to cut interest rates tomorrow. There is still speculation that Eurozone economies could be hit with credit rating reductions by S&P.

USD

Today is the first day the Bank of England is using the extra liquidity offered by the Fed last week. This liquidity was offered by 6 central banks in the US in a bid to reverse tightening availability of credit by allowing major central banks to borrow USD at half the cost.It has now started offering unlimited liquidity of USD in a 7-day and 84-day repo operation. This was the first time the new cheaper interest rates announced by the Federal Rerserve (as they reduced the cost of borrowing USD from 100bps to 50bps). The dollar traded lower against most major currencies yesterday and the dollar index, which measures the US currency against a basket of six others, fell to 78.498 from 78.654 the previous session.

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Written by Tom Tong

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