Pound falls on economic gloom; September Exchange Rate Outlook

Good morning. Sterling fell broadly on Tuesday, hitting 5 week lows against the dollar and its weakest versus the Swiss franc since early 2009 as concerns about the global economic outlook prompted investors to dump higher-risk currencies. We'll take a detailed look at this in a moment, after the usual snapshot of rates as at 08:30am:

Pound falls on economic worries

Despite better than expected mortgage figures and credit data from the UK, the pound fell due to concerns about the global economy. As the US slowdown gathers pace, investors are worried and are moving funds to safe haven currencies such as CHF, USD and JPY. Riskier currencies such as Sterling are suffering as a result.

The perception is that UK data is about as good as it's going to get, which is why the good mortgage data yesterday did nothing to help the pound. Despite good growth so far this year, analysts think that the recovery is unsustainable, and there is more talk about the US sliding back into recession. If this were to be the case then the UK would likely follow suit, so there's not much on the horizon that's Sterling positive at the moment.

Eurozone Unemployment

Unemployment in the eurozone remained at a record rate of 10% for a fifth month in a row, according to official figures. Nearly 16 million people remain unemployed in the 16 countries that use the euro, the EU's statistics agency Eurostat said. The agency also reported a fall in the rate of inflation in the eurozone.

The figures were as expected, and so made little difference to exchange rates. The data has reinforced that view that the European Central Bank will keep interest rates low for the foreseeable future, with inflation less of a concern than economic growth. So, with low interest rates expected, this has helped keep the Euro weak and that's the reason GBP/EUR rates are still over the €1.20 level. Without this weak data then it's likely the pound would drop further against the Euro.

Where will exchange rates go through September 2010?

It all depends on economic data from the US, UK and EU. Regardless of US data, it's likely the USD will remain strong while things are uncertain due to it's safe haven status. We therefore expect rates to stay between $1.50 and $1.56 through this month.

For the GBP/EUR cross, it's harder to predict. We have the pound becoming weaker on the one hand, which taken alone would suggest GBP/EUR rates will fall. The Eurozone however is also facing problems with soverign debt still a worry. The Euro therefore is also weak. It's really about which economy will be the weakest, and it's a close thing at the moment.

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