Summary of recent exchange rate movements
Last week saw some interesting data releases that caused continues volatility in the currency markets. We first had an inflation report issued by the Bank of England earlier in the week, that showed the central bank expects inflation to fall to 0.5 % before rising to just above 1 % in two years time, while the economy will recover at a slower pace than previously thought. As I said in this blog, the forecast was much worse that the governments own forecasts, and so caused the pound to fall.
Then, we had the dire figures from the Eurozone - both the German and EU figures were much worse than expected, which caused the GBP/EUR to rise to the healthiest levels for Euro buyers we have seen in some time - we're still there right now, just above 1.13.
So, the week ended slightly up on the Euro, and despite some fairly big swings on the dollar through the week, actually ended up on Friday roughly where it started the week at.
Despite sterling's gains on Friday, analysts say that any gains in the currency would likely be limited on the view that the UK economy will stay weak for some time, so dont bank on the rate continuing to climb and climb.
As I've often said, spikes in the market are often extremely short lived, and it's clients that have a trading facility open ready to use, that are in a position to make a quick decision and take advantage of these spikes.
Sterling
Sterling has faced further weakness of late, following an extremely gloomy outlook for UK economic recovery by the Bank of England. It stated any recovery is likely to be very slow and protracted, and the BoE’s view is much worse than the government’s recent forecasts. As the UK’s economy is heavily reliant on the Banking and finance sectors, uncertainty here has also increased risk aversion for the pound.
News that the Quantitative easing measures are to be increased by a further £50bn has not helped either. Mervyn King said that it was too early to know whether the new policy of quantitative easing was working, and added that it would be at least 6 to 9 months before it will be clear. We expect continued downward pressure on the pound in the coming weeks as investors continue to focus on the safe haven currencies such as USD, but Sterling should hold firm in the long term.
Eurozone
Other than the BoE report dragging down the pound, Eurozone fundamentals seem to be the main driver for this currency pair. Recent figures from Germany show that their economy suffered its largest contraction since reunification, falling 3.8% in the first quarter, and 6.9% year on year. This was against expectations of 3.0% and 6.0% respectively.
This has caused Euro weakness and pushed the GBP/EUR cross back above 1.13. In addition, Eurozone GDP was also worse than forecast, declining by 2.5% Quarter on Quarter against the expected 2%. Year on Year the figure was -4.6% against an expected -4.1%. This is heavily weighed by the German figures, being the largest economy in the 16 nation zone.
Unlike the UK and US, the Eurozone has more scope to cut interest rates to stimulate the economy, and that’s what we’re expecting in June.
So what we have here then, is a tug-of-war where the decline in UK economy and dire forecasts are pulling one way, with possible rate cuts and EU Quantitative easing pulling the other. We believe the worst is yet to come from the EU, and so ultimately sterling should win the tug, but we won’t see for some weeks yet.
This weeks Data
We have a lot of important measures this week. The most significant is listed below, but the ones to keep a close eye on are the UK's CPI (a measure of price movements of a representative shopping basket of goods and services) and RPI (a statistical measure of a weighted average of prices of goods and services purchased by consumers) - these figures are due tomorrow, and give a good outline of inflation in the UK.
Friday also sees some important UK data - government spending, imports and exports, and personal consumption - this will give an idea how the UK is faring, and could cause rates to climb, or indeed to plummet - so watch out! For those that are risk averse, consider protecting yourself with Forwards, Stops and Limits. We also have lots of important US releases, so anyone looking to buy or sell USD should keep in touch to find out likely movements.
So, wheras last week's movements were caused by Stering weakness, then reversed by Euro weakness.. this weeks developments will likely be caused by focus on the pound.
Monday
EU - Trade Balance
US - Treasury Speech
US - Houseing Market Index
Aus - RBA Speech
Tuesday
Aus - RBA Minutes
UK - Consumer Price Index
UK - Retail Price Index
Ger - ZEW Economic Survey
US - Building Permits
US - Housing Starts
US - Fed Speech
Jap - Gross Domestic Product
Wednesday
Aus - Consumer Confidence
Aus - Wage Price Index
Ger - Producuer Price Index
UK - BoE Minutes
Swiss - ZEW Survey
Can - Consumer Price Index
US - FOMC Minutes
Thursday
Ger - Purchasing Managers Index
EU - Purchasing Managers Index
UK - Retail Sales
UK - Total Business Investment
US - Jobless Claimes
US - Philly Fed Survey
Friday
Jap - BoJ Minutes
US - Fed Speech
UK - Government Spending
UK - GDP
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