Foreign Exchange Insight : European Shares Plummet, Sending GBP USD Rate to 6-Week Low as Investors Take Flight From Eurozone Sovereign Debt Crisis

6 Sep 2011 at 6 AM - Written by John Cameron

STORY LINK Foreign Exchange Insight : European Shares Plummet, Sending GBP USD Rate to 6-Week Low as Investors Take Flight From Eurozone Sovereign Debt Crisis

The Pound Euro exchange rate (GBP EUR) is 1.1437. The Pound Dollar exchange rate (GBP USD) is 1.6075. The Pound Australian Dollar exchange rate (GBP AUD) is 1.5295.

More worryingly poor economic data releases and renewed concerns that the Eurozone’s sovereign debt crisis is set to spread saw appetite for risk plummet during yesterday’s session in the markets.

Figures released in the world’s second largest economy, China, yesterday showed that activity in the economy’s service sector increased at its slowest pace since records began. With China’s policy-makers continuing to tighten domestic monetary policy in an effort to curb rising prices, the services sector figure raises doubts about China’s ability to continue at its present growth levels.

Meanwhile, August’s Markit/Cips Purchasing Manager Index for the UK’s services sector registered at 51.1 yesterday versus analysts’ expectations of a 54.0 reading. The figure showed a sharp decline from July’s 55.4 figure. This monthly contraction represents the largest drop in activity in the key UK services sector for over a decade. With the majority of the British economy comprising services sector enterprises, this represents extremely bad news for investors holding Sterling-denominated assets.

The weak global data releases, which followed hot on the heels of Friday afternoon’s dire August Non-Farm Payrolls figure in the US, which showed a zero reading, caused a downward move in crude oil prices and a pronounced dip in global appetite for risk.

The downward move in risk sentiment was accentuated by renewed concerns over the Eurozone’s sovereign debt crisis as the spreads on Italian and Spanish bonds once again widened, in spite of the European Central Bank’s actions to buy them at auction. Investors are particularly worried about how contagion from a potential debt default by Italy or Spain might impact on Eurozone retail banks. These fears saw shares in European banks trade sharply lower yesterday, triggering a general sell-off in European shares indices which saw Frankfurt’s DAX index close down by 5.28% and Paris’s Cac 40 lose almost 5% on the day.

The shunning of riskier assets by market participants saw concerted safe haven support for the US Dollar yesterday, taking the GBP USD rate down to a 6-week low of 1.6061 overnight. The Swiss Franc also picked up safe-haven support, while the high-yielders came under heavy selling pressure as investors scaled back on risk. This move saw the GBP NZD rate break back above 1.9400 for the first time since 29th August to touch 1.9467 overnight.


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