Foreign Exchange - UK Daily Update - Wednesday, August 31, 2011 7:45 - 1 Comment

Fed Minutes Heighten Chances of Further Easing after Confidence Nightmare: World First Morning Update 31st August 2011

httpvh://www.youtube.com/watch?v=jGwbCm-g4Is

It was the same old story yesterday with poor confidence measures from both the United States and Europe weighing on equity markets and risky assets. US consumer confidence fell to the lowest levels since April of 2009 an industrial economic confidence in Europe continued to tumble as well. We all know the reasons behind these declines; fears over the European debt crisis, worries about the US credit rating after the Standard & Poors downgrade and fears that fiscal tightening in order to bring deficits under control will further stymie already very tepid growth.

The situation was rescued somewhat however as it became clear from the publication of the August 9th Federal Reserve meeting that a serious discussion about further economic stimulus via monetary policy had taken place. A further discussion will take place at the September meeting and we would expect that given the continued decline in the fortunes of the US economy that at least one of the three dissenters will switch sides.

Indeed one of the more dovish members, Chuck Evans, of the FOMC (those more prone to voting for additional stimulus) said yesterday that the he was in favor of some of the most aggressive policy actions of anyone on the committee and that perhaps the Fed should give desired levels for indicators such as inflation or unemployment at which further easing should be used. He did however say that the economy was heading sideways, not lower, and that the unemployment is consistent with previous recessions.

In Europe the debt picture continued to sink after the Italian bond auction did not go quite as planned. Italy sold EUR7.74bn in 3,7 and 10yr debt, close to the target maximum of EUR8bn however the EUR3.75bn 10 year issue drew a lower bid/cover ratio of 1.27 vs. 1.38 at the previous similar sale on July 28. So less people were demanding Italian debt. Now while the yield also slipped from 5.77% at the previous issuance to 5.22% this was actually above the market rate at the time of 5.05% and therefore cannot really be counted as a strong backing of Italian debt. I expect we will see further ECB buying of Italian and Spanish debt ahead of a big Spanish auction tomorrow.

Data from the UK was quiet with mortgage approvals rising for a 3rd consecutive month to reach the highest level since May’10. The pound was hit however after a report suggested that foreign purchases of gilts slumped to £440 million in July, the weakest result since March. This may mean that the UK is losing some of its ‘safe haven’ luster that has been so widely talked about in recent weeks.

German retail sales have started the day in poor fashion by falling twice as much as expected and we will also be closely watching the German unemployment numbers at 08.55 to see if that surprise slip in Q2 GDP has caused a sharp fall in jobs.

Latest exchange rates at time of writing