Monday, 6 December 2010

Pound vs Euro & Pound vs US Dollar

6th December 2010

Where to for Sterling / Euro pair?

Last week started relatively unspectacularly as the focus remained on the debt crisis in the Euro-Zone with particular attention on Ireland and Portugal and the stance that the ECB would take.

We saw Sterling exchange rates gain momentum against the Euro in trading on Tuesday and Wednesday seeing highs on both days and flirting with 1.1985 on Weds, a price not seen since the late Sept and the then Euro sell-off and subsequent decline. Sterling gained support from defensive inflows as investors saw Sterling as a safer option on the back of positive news from independent analysis of the UK budget deficit and good PMI figure in construction on Wednesday albeit UK economic calendar being notably light.

Sterling strength evaporated on Thursday in a choppy trading session as the focus shifted to the imminent ECB decision, the fact that the Euro had not been oversold and doubts remained over the UK recovery on the back of Nationwide showing a slowdown and subdued housing market which weigh on prices. Furthermore, consumer confidence is relatively week and private sector debt high. This accompanied with tax rises from 2011 and concerns over debt in the banking sector is adding to market uncertainty.

Friday’s session started with the Euro looking bullish due in a range-bound early session propped up by the news that the ECB kept their main refinancing rate at 1% and that any exit rates should be put on hold for the short-term. Euro buying was put down to ECB demand which gave strength to the opinion that due to the overarching political pressure the ECB would offer unlimited liquidity to respective central banks.

Exchange Rate Forecast: We think that further defensive buying of Sterling may occur as fears abound that European Central banks may become addicted to the generous ECB offered liquidity. It is believed that the ECB stance has already been factored in to prices in which case it may be the time to bring those Euros home.

Sterling to US Dollar rates fall from 10 month high. Dollar exchange rate forecast:-

This time last month, we saw Ben Bernanke introduce the second round of QE for the US, which as expected saw the dollar lose strength and relight fear that the world currency may be losing its ‘safe haven’ status, with investors pulling funds to speculate in riskier currencies, leading to drops in dollar exchange rates.

‘Cable’ reached heights of just below 1.63, a level untouched since the beginning of 2010, and November remained a bleak outlook for the ‘Greenback’. What more could the FED have asked for to happen to Europe than an Irish bailout, with fear that Portugal and then an economy larger than Greece, Ireland and Portugal put together, i.e. Spain, raise questions about the possibility of following suit. How about rumours that Germany might pull from the euro altogether and return to the Deutsche Mark? A fear that may not be as ridiculous as first thought.

Historically, a weakened euro has lead to a strengthened dollar, and it would seem history has indeed repeated itself, evident by a drop in GBP/USD to as low as 1.54. This, along with better than expected midweek data releases, in the form of Non-Farm Employment Change, for the US, may have been the reason why each individual pound bought you less dollars. However, as the week progressed, poorer US data figures, such as Unemployment Claims, meant £100,000 bought you almost $1000 dollars more than the day before.

Due to less important data releases occurring at the beginning of this week, we could see the end of the week affecting the markets in a more volatile fashion. Data of note, will be Thursday’s BoE decision on UK interest rates, which if forecasts are correct, 0.5% may be ‘hitting the nail on the head’, so to speak, not to mention nearly two years without change.

So in summary, rates have fallen from a 10 month high due to the US Dollar gaining strength in the wake of the EU’s problems. We’re still trading well above $1.50 however, so if you wish to take advantage of the rate and protect yourself against further market losses, contact us today to discuss the options available.

Weekly Economic Data that may affect exchange rates

This week we have interest rate decisions for Canada, Australia, New Zealand and the UK. While rates for all zones will probably remain on hold, the accompanying comments can often cause significant changes in rates. In addition, there are various inflation measures for the EU and UK which can also affect the chances of future rate movements, and so we expect some volatility for GBP/EUR rates.

We list the main data below, but of course the effect this will have on your requirement depends on the currency you need to buy or sell, the volume you need to convert, and the timescales you’re working to.

Discuss these aspects with an expert FX trader at FCG and find out about the various options you have available. In this way you are armed with the knowledge to enable you to make an informed decision on when to fix your rate.

Monday
From the UK Halifax House Prices is the only data of note. If the monthly gain in prices is less than 0.3% then the pound could weaken. From the Eurozone we have some confidence measures which will be interesting to see after the markets were calmed regards the EU bailout for Ireland.

Tuesday
Things get busier in terms of data releases as we see a GDP estimate for the UK. The figure estimates UK growth, and as such can often have a big impact on Sterling exchange rates. Also for the UK we see Retail Sales, Industrial Production and Manufacturing Production. So, lots that will give clues on the UK economy; expect Sterling volatility.
We also have some interest rate decisions for Australia and Canada; we expect no change.

Wednesday
Following Tuesday’s interest rate decisions today is the turn of New Zealand. From the UK Shop Prices and a measure of Consumer Confidence from the Nationwide are the releases to watch for. For the Euro, we could see movement as Germany, the largest economy in the EU, releases Industrial Production and Trade Balance figures.

Thursday
There is an Interest Rate decision for the UK today in addition to Trade Balance figures. Nobody expects the rate to change from 0.5%, but there is an outside chance further Quantitative Easing (QE) could be announced. It’s not likely, but if it does happen expect Sterling to fall sharply.
From the EU we have a monthly report that contains an analysis of the current climate.
From the US various measures of employment could affect GBP/USD rates.

Friday
We end the week with various inflation measures from the UK. If inflation is higher than expected, it usually pushes Sterling higher. This is because higher inflation normally indicates a potential hike in the interest rate. The increased return for investors spurs demand and strengthens the currency. Of course, lower than expect figures could have the opposite effect.

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