A fight to the bottom of the pile

It’s been bad news all round for UK, US and European markets. In the UK, a report into the budget has claimed that Britain’s poorest will be a hit much harder than the richest labelling the budget as regressive. In the US, existing home sales have fallen to fifteen year lows, and in the Euro-zone, Ireland have suffered a credit rating downgrade. The uncertainty over the global outlook has maintained a risk-averse view for currency investors leading up to Friday’s US and UK GDP figures. Sterling was trading at the mid market rate of 1.5435 against the US Dollar and 1.2153 against the Euro at 9.30am this morning.

Pound Sterling – UK Markets

The Pound is dropping against both the Euro and the US Dollar this morning after making back some gains on the Dollar last night. The Institute of Fiscal studies has published research which claims that the coalition Government’s budget is ‘regressive’ by actually hitting Britain’s poorest families hardest. This is in direct contradiction with the Government’s claims of a progressive budget that delivers fairness targeting richer house holds more than poorer ones. The report has looked at the distributional effects of all tax and benefit reforms with losses calculated as a percentage of net income. The Treasury rejects the report as non-valid claiming it is selective. This may re-invoke the political debate over Government plans to eliminate the record deficit of 11 percent of GDP by increasing cuts. Yesterday’s comments regarding the ‘significant’ risk of a double recession in the UK from the newest Bank of England policy member, Dr. Weale comes as a double blow to UK markets this week. The tone set in advance of Friday’s second quarter GDP figures is therefore downbeat.

US Dollar – US Markets

Figures for the sales of US existing homes have been dire showing a slump of 27.2 percent in July hitting their lowest level in fifteen years. This comes before similar figures for new home sales today which are expected to show no change although statistics for the housing market have had a tendency to disappoint as of late. Also added to the melting pot today will be durable goods data expected to show a small rise of 3 percent, MBA Mortgage Applications and Crude Oil Stocks data. Despite the wave of poor data, the growing concerns over the US recovery and speculations that the Federal Reserve will buy more treasuries, are encouraging investors to be risk averse ironically giving some support to the US Dollar seen as a safe haven currency.

Euro – European Markets

The Euro is experiencing pressure from the poor US housing statistics encouraging risk aversion as well as Ireland’s downgrading to AA- by Standard and Poor’s last night. Ireland’s credit rating has been cut down one step to AA- by Standard and Poor’s due to their view that the rising cost of supporting the country’s struggling banks will swell the budget deficit. It predicts that 10 billion Euros more than estimated will be used by the Irish Government to help banks. This is the lowest level for Ireland since 1995. Ireland’s rating is still one notch higher than Italy, three higher than Portugal and seven higher than Greece.

Other Currencies – Highlights

The Yen has begun to weaken as reports have emerged in Japan that Japanese Finance Minister Yoshihiko Noda has given a long awaited indication of what will happen with currency policy, albeit vague, saying that ‘appropriate action’ will be taken on the currency. The Yen has recently hit eight year highs against the Euro, as risk-averse investors pour money into the ‘safe’ Yen causing damage to Japanese exports as a result of the strengthening currency. The Nikkei newspaper has claimed that the Bank of Japan is considering further monetary easing. This bout of safe haven buying has also seen the Swiss Franc hitting further highs against the Euro. For a live quote or to tell us about your foreign exchange requirements, please call us on +44 (0)20 7740 0000