Pound to Euro
Last week saw Sterling continue to march back towards the 1.20 mark, moving up as high as 1.18 on the mid-market. The run continued yesterday, however now seems to have leveled off in anticipation of the data releases from the UK...
This week sees a very active calendar, with major releases on every single day. Yesterday morning saw the manufacturing PMI from the UK and Eurozone, which saw all figures higher than expected, with the UK figures a massive 6% better than forecast. This supported sterling and we briefly saw highs of 1.1815 shortly after the release, extremely positive news for anyone buying Euros.
Tuesday sees PPI inflation data for the Eurozone from June, which is likely to provide a further indication of their position in the current economic cycle, and how soon they are likely to see recovery. On Wednesday we see the services side of the PMI data released, with forecasts suggesting that again, the UK will be stronger than the Eurozone, and also Retail Sales figures from the continent for the month of July.
These are more indicative of consumer confidence in the economy, and an increase would indicate a shorter timescale for recovery on the high street.
Thursday sees interest rate announcements for both the UK and the Eurozone. Whilst both central banks are highly likely to hold base rates at their current levels, it is the prospects of further Quantitative Easing which is likely to move the markets.
Any further QE announcements are likely to undermine their currencies, and opinion is split on the likelihood of further easing from both banks. Most participants favour no further action from either the BOE or ECB, however, it is unquestionable that we will see some market movement if there are any surprises.
Friday morning sees PPI inflation from the UK, which has read negative in previous months, but is likely to be fractionally positive, showing a slight increase in prices, suggesting the economy may be starting to improve.
Pound to US Dollar
GBP/USD cross hits highest levels of 2009 (since 23rd October 2008) on Friday and looks to continue rally.
On Friday we had the release of Quarter 2 US GDP figures which showed the economy contracted by 1.0%, but was better than the expected 1.5% decline. This was closely followed by the Chicago Purchasing Managers Index (a monthly measure of US business conditions) which was better than expectations.
This caused a rally in global risk appetite amongst investors and helped Cable to reach a Mid-Market level of 1.6733 before European markets closed. Monday has seen better than expected manufacturing data from both sides of the Atlantic, and more importantly some very encouraging figures from UK banks with Barclays announcing a profit increase of 8% to £3bn, and HSBC reporting a rise of 5.1%.
Couple this with an equity market rally which has helped the FTSE hit it’s highest level since October, and it’s hard to see the rally in risk abating.
What does this mean? As we see signs of a global economic recovery, the US Dollar will suffer as investors move their money out of the Greenback (seen as a safe-haven currency or somewhere investors will keep funds in times of market turmoil) and into riskier assets.
The Pound is currently seen as a high risk currency and therefore as UK and US figures get better, GBP/USD will move twice as quickly as funds are moved from USD to GBP, hence the jump from 1.63 last week to a high if 1.6930 today.
Later this week the Bank of England will announce its decisions on interest rates for this month which will most likely be to hold them again at 0.5%. They are then expected by most analysts to announce a halt to its quantitative easing program and a slightly higher inflation projection than before which will help to further underpin Sterling.
Finally on Friday all eyes will be on the release of Non-Farm Payrolls data for July, with the forecast for a further decline from -467K to -345K, which although is slightly reduced, still indicates a slowing US economy.
Non-farm payrolls is the most closely watched indicator in the employment situation in the US and is considered the most comprehensive measure of job creation in the US. With all of the above releases in mind there is a distinct possibility that we could see Cable trading above 1.70 for the first time in over 9 months.
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