Sterling drops in volatile week.
Todays post will take a look at this past weeks events that have weighed heavily on the pound, and the outlook for where Sterling Exchange Rates may be headed. This week we lost 2% against the USD and 3% against the Euro. These are big drops that may be set to continue....
Swiss bank cause currency market volatility
Sterling fell against the stronger US Dollar yesterday and hit a new 6 week lows against the euro after the swiss National Bank (SNB) intervened in the currency markets.
The SNB purchased foreign currency in an attempt to weaken the Swiss franc. Traders said the SNB was bidding on euro/swiss franc, boosting the euro and seeing the franc posting its biggest ever one-day drop against the single currency. This has also affected Sterling Exchange rates.
The significant move up in euro/Swiss has helped euro/sterling to brush the topside, while better than expected U.S. retail sales have kept the Sterling Dollar GBPUSD rate low.
So while there aren't any sterling specific factors to drive the market today, the pound is being undermined by the actions of the SNB on one side and the U.S. data on the other.
Also, concerns over the UK banking sector as previously discussed here on this blog, combined with the weak economic data and uncertainty over the effects of the Bank of England's quantitative easing programme, have come together to see the pound drop over 2 percent against the dollar this week and more than 3 percent against the euro.
"Tellingly, (this week's) move finally took (euro/sterling) out of the clearly defined descending pattern it had been stuck in since the start of the year," said Bank of New York Mellon's Simon Derrick in a note. What he means is at the start of the year, GBPEUR rates climbed from nearly €1 to the pound to €1.14. This steady rise in rates seems to be over and opens the way for further decline in the pounds value.
"Given that previous moves of this magnitude have typically signalled extended periods of sterling weakness, we would not be surprised to see the same outcome now." So, the experts seem to think that Sterling is in line to continue to drop.
Also this week we saw the Bank of England kick off its foray into quantitative easing on Wednesday. Analysts and the currency markets are waiting to see what impact it will have on the economy.
"Where (sterling) goes from here depends in part on whether we start to see some signs of life in the UK economy and if QE is starting to have a positive effect on the broader monetary aggregates and activity," said Philip Shaw, chief economist at Investec
As I outlined in a post earlier this week, in my view it will have limited success and may well only lead to serious devaluation of the pound. I expect lower exchange rates throughout the year, and no real recovery until 2010 at the earliest.
UK Recession gathers pace
The UK economy contracted 1.8% between December and February, the National Institute of Economic and Social Research estimates. The fall in GDP was bigger than the 1.7% drop seen in the three months to the end of January.
The level of economic activity is now 4.3% below its peak of April 2008, according to NIESR's data. Meanwhile, data showed the UK's goods trade deficit widened to £7.745bn in January from £7.232bn the month before. Exports to non-EU countries fell by 16%, the Office for National Statistics said, as the global downturn hit demand for UK made goods.
However, exports to the UK's main trading partner, the EU, climbed by 6% as the pound weakened substantially against the euro.
China forecasts world recovery
China's Premier Wen Jiabao has said that he expects China and the rest of the world will be better off by next year. Mr Wen said his government was ready to introduce more economic stimulus measures if needed. Many analysts have echoed his views that recovery for most economies will happen in 2010. However nothing is ever guaranteed in the currency markets, and even if it was certain recovery will take place, that's not much use if you cannot wait that long for your currency purchase!
If you have a requirement to purchase currency with Sterling this year, then most forecasts do seem to suggest a continuing decline in the pounds value. Consider locking in rates today to protect you from adverse market movements.
In other news
Disgraced US financier Bernard Madoff has been jailed, after he pleaded to eleven charges surrounding an estimated £35billion pound fraud. Some of his victims clapped when he was handcuffed and led out of court in new York. He had earlier said he was "deeply sorry and ashamed". The 70-year-old defrauded thousands of investors in a fraud he admitted had been running since the early 1990s. Nobody knows for sure how much money he made.
Todays Data
Very quiet day in terms of economic data releases. We have already seen producer and import prices from switzerland. These were worse than expected and have weakened the CHF. In fact rates are now close to 1.66 - a few days ago we were below 1.60. This is due to the measures outlined at the top of todays post.
We also have employment data for Canada and EU Retail Sales and Labour Costs. Next week is very heavy with data releases, so check back on Monday for detailed information on what is being released and the effect on Sterling Exchange Rates.
Enjoy your weekend.
Labels: EUR, Exchange Rate Forecast, GBP, Sterling Outlook, USD
