Foreign Exchange Rates : GBP USD Loses Ground on Risk Sentiment and King's Comments

May 3, 2011 - Written by John Cameron

STORY LINK Foreign Exchange Rates : GBP USD Loses Ground on Risk Sentiment and King's Comments

The Pound Euro exchange rate (GBP EUR) is 1.1212. The Pound Dollar exchange rate (GBP USD) is 1.6638.

The major news event over the last 48 hours has been the killing of Osama Bin Laden by US Special Forces. Although stock markets initially made gains yesterday after the announcement of the terrorist leader’s death, this forward move was relatively short lived, with the benchmark S&P 500 index closing down on yesterday’s session as equities markets continued to respond to changes in global risk sentiment. This losing session was in spite of yesterday’s release of a better-than-anticipated US ISM Manufacturing figure for April, which suggested that US producers are benefiting from a weaker Dollar.

A leading determinant of risk sentiment continues to be the European sovereign debt situation and the effect that individual bail-outs will are having on individual countries and the Eurozone as a whole. Greece is currently attempting to renegotiate the terms of its bail-out, with Finance Minister George Papaconstantinou proposing a crack-down on Greek tax evasion in return for an extension to the term of £98bn worth of seven year rescue bonds.

There remains the possibility that Finland, a peripheral nation on the edge of the Eurozone, may have a major part to play in the future of the Euro. The nationalist ‘True Finns’ party, which came third in Finland’s recent elections to gain a share of power, is considering using its veto to vote down the proposed ECB bail-out for Portugal. If they persist with this stance would make future Eurozone bail-outs almost impossible to pass, without an alteration to the Eurozone’s constitution.

Turning to fundamental indicators in the Eurozone, over the last few sessions, Ireland has lowered its 2011 GDP growth forecast from 1.7% to 0.7% and Spain has announced that its unemployment rate has risen above 21%, while Spanish retail sales have shown their largest drop for two years. Taking all of this into account, it appears unlikely that the ECB will consider the Eurozone economy strong enough to consider raising its key lending rate when it meets on Thursday.

Elsewhere, although it was a public holiday in the UK, Bank of England Governor Mervyn King still found time to knock the Pound when he addressed the European Parliament. King described the UK’s level of national debt as a ‘massive’ challenge that would be made more difficult by UK interest rate rises. These comments hurt Sterling, with GBP USD finishing the day at 1.6658, down from a high of 1.6738. Similarly, the GBP EUR rate dropped to close 0.5c off its intraday high of 1.1288.

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