Good Morning. Today we have Gross Domestic Product (GDP) figures and Retail Sales data for the UK, both of which will be released at 09:30am. In a moment we will take detailed look at how this will affect Sterling exchange rates, and also the effect the EUR value is likely to have on GBPEUR exchange rates.
First, let's take stock of where the markets are after an important week for the currency markets.
Where the pound is after the UK Budget
After the budget, as detailed already in this blog, the pound fell dramatically as the government announced huge debt and tax rises, painting a gloomy picture for the UK for the next 2 years. Exchange rates fell very quickly.
Yesterday however, the pound made some gains as investors took profits on Sterlings fall after the budget statement. There is still caution about Britains increasingly grim public finances however.
Some currency traders took full advantage of Sterlings fall to a three-week low on Wednesday and bought Sterling back to make profits. This caused the pound to rise back yesterday, however it has been very short lived. There is not much optimism for the pound after a bigger than expected fall in factory orders highlighted ongoing weakness in the economy.
So, the pound fell, recovered slightly yesterday, but has continued to fall in anticipation of GDP figures today. At the time of writing GBPEUR is 1.1070 and GBPUSD is 1.4625.
What's next for the pound?
Well, we already know the state of the UK economy and the fact it's not likely to recover for many years. As I will outline below, further poor data is expected today that may cause further falls. If rates were just based on UK data, then I would suggest rates will continue to drop and drop.
However, we need to take into account the Eurozone. All headlines this week have been on the budget, the pound and very UK focused. This has taken focus away from the Eurozone, and of course the EU economy will have an effect on pound to euro rates also.
Eurozone
The EU are also in a similar position of recession, however the difference is that they have been taking a very different approach. EU interest rates are not almost zero like the UK and US, and as yet they have not 'created' new money through quantitative easing.
I think that we will start to see interest rates coming down in the EU next month, which as regular readers will know usually causes selling of the Euro and a decline in value. Also, there have been hints that the European Central Bank (ECB) may have to try quantitative easing, where money will be created and pumped into the economy. This may cause a decline in euro, which would normally cause exchange rates to rise.
So, there is scope for improvement, but it's like a tug-of-war where the decline in UK economy is pulling one way, and possible measures in the EU are pulling on the other. Who will win? Nobody knows.
Clients that have a requirement to purchase Euros are gambling the cost of their purchase on this tug-of-war, and if you dont want to lose out, then talk to us about tools we have available to protect you whichever way markets move.
UK GDP Figures
Gross Domesic Product is a measure of the total value of all goods and services produced by the UK. GDP is considered as a broad measure of the UK economic activity and health.
The figures are expected to show that the UK economy shrank in the first 3 months of this year at about the same pace as it did in the final quarter of last year. Analysts forecast that the economy will have shrunk in the last 3 months by 1.5 percent.
The government has already warned during the budget that the economy will shrink this year at its fastest pace since World War II following other figures this week that show more than 2 million people are now unemployed. For the most part, this decline is expected and so may well be priced into the market already. However, if the figures are any worse than expected, we may well see exchange rates continue to fall.
"The sharpest falls in GDP may have already happened - but we are still talking about contracting GDP and rising unemployment for the rest of the year," said the cheif economist at Barclays capital.
If you cant afford rates to drop below 1.10 on the Euro, but still want take a gamble in the hope exchange rates may rise, then speak to us about Stop and Limit orders.
Retail Sales
Again, these UK figures will be released at 09:30. This measures the total receipts of retail stores. Monthly percent changes reflect the rate of changes of such sales. Changes in Retail Sales are widely followed as an indicator of consumer spending. If worse than expected then we may see the pounds decline continue and exchange rates to fall.
Other Data Today
Home Sales and durable goods orders will be released in the US this afternoon. Get in touch to discuss likely effects on GBPUSD rates.
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