Monday, 31 January 2011

31st January 2011 :
In this week’s Report:

• Pound vs. Euro summary
• UK economy contracts, weakening the Pound
• Sterling vs. US Dollar
• The week’s data that may affect exchange rates

(For currencies other then EUR and USD, contact us for a consultation)

Sterling vs. Euro falls on shock GDP contraction

Sterling plunged on Tuesday last week after a shock contraction in Q4 UK GDP. Britain's economy shrank 0.5% in the last three months of 2010, confounding forecasts for a 0.5% expansion, with December's heavy snow accounting for only part of the first contraction in five quarters. Sterling fell approx. 1.75% from 1.1720 to 1.1536:

The figures will be bad news for the government, which is due to start cutting public spending in early in 2011. They will also cast doubt over previous market expectations that the Bank of England will raise interest rates in the first half of the year.

While last week’s GDP figures are backward-looking, they are nevertheless crucial to understanding the resilience of the economy to shocks. It seems that the economy is incredibly vulnerable and with the fiscal tightening yet to fully bite, we will have to brace ourselves for a bumpy ride.

Other economic figures last week showed that Britain's public sector net borrowing rose from a year ago to its highest December reading on record and UK consumer confidence suffered an 'astonishing collapse' as Britons' confidence in the economy and their finances witnessed its biggest drop in close to 20 years, raising fears that the Government's austerity onslaught will set off a self-feeding downward spiral.

Despite all the doom and gloom Sterling did receive a brief lift after minutes from the Bank of England's policy meeting showed policymakers considered an interest rate hike with (MPC) member Martin Weale unexpectedly joining Andrew Sentance in voting for a quarter-point rate rise.

It’s important to note however that this meeting occurred a week before the Q4 GDP data the MPC members would have based their decisions on existing forecasts. Sterling reacted positively to this news albeit a little muted and recovered 0.75% of its losses to rise to 1.1637.

Sterling vs. US Dollar;

A turbulent week for Sterling/Dollar came to a head last Friday with the release of the eagerly anticipated fourth quarter US GDP figures. As with the UK GDP figure reported earlier in the week, US GDP came in below expectation, just not to the same degree. The headline reading came out at 3.2% growth down form expectation of 3.5% Quarter on Quarter; still a solid level of growth.

The reaction to this news was surprisingly muted as the figure was so close to expectations. There was however further reaction in the markets to yet more poor UK data, as Friday saw a very weak UK consumer confidence survey. This report helped to fuel currently rife speculation in the financial media that the British Government’s austerity measures could serve to further damage the plight of the economy.

This said the GBP/USD remained mainly range bound in the high 1.50’s on Friday afternoon as people are still speculating when or if the UK will raise interest rates. One side of the argument clearly sees interest rate rises needed to combat high forecast inflation, yet the other sees no room to raise lending rates in a slowing economy with low business and consumer confidence.

One thing that is always sure, the currency markets are never one directional. We will all have to wait and see how the BoE and the Government goes forward in attempting to rebuild the economy, and there will always be a time when your particular currency need is in a better or worse place. The trick is to know what you can and can’t do and to act quickly if a good exchange rate becomes available.

A trading facility at Foremost Currency Group allows you access to over 20 of the world most heavily traded currencies, with up-to-date expert knowledge at hand to help guide you through the markets. Indeed utilising your facility to take out a Forward Contract will allow you to book an exchange rate for up to two years into the future, so if that good rate appears and you don’t need the currency yet you can fix in with the peace of mind that the rate and your money are safe.

Weekly Economic Data that may affect exchange rates

Below we list the main data released for the week ahead. The implication of these economic releases will differ depending on the currency you need to buy or sell. For a free consultation on how this could affect the cost of your currency requirement, open an account with us today. This is free to do, doesn’t obligate you in any way, and simply gives you access to our market knowledge and commercial exchange rates.

Monday
There is no data of note from the UK or EU today. The main economic information comes from the Canada in the form of GDP and Inflation data. There are also some inflation measures from the US. Data from the states has been weak lately, helping push GBP/USD higher. Further weak data could push rates higher still.

Tuesday
Today we see Inflation data and Mortgage approvals for the UK. Further poor data following a raft of disappointing economic figures could push the Pound lower against other currencies. Against the Euro, Unemployment figures for Germany & Europe today could cause volatility if the figure is different from the forecasted 10%. The US releases manufacturing and construction figures today also.

Wednesday
An unusually quiet day for data, with the only release being inflation data from the EU. We expect the Producer Price Index to show a monthly gain of 0.3% and an annual gain of 4.5%. If it’s higher then it supports the case for an EU interest rate hike, and this may push GBP/EUR exchange rates lower.

Thursday
Retail Sales are released for Germany and Europe today. It’s a good barometer of consumer confidence, and so we may see volatility in GBP/EUR rates today. The US has some jobless figures at lunchtime, which may weaken the US further if more than 4m people are claiming.

Friday
We end the week with further earnings and jobs data from the USA. Non Farm Payrolls are releases at 13:30 showing how many more people are employed excluding the agricultural sector (As it’s seasonal). The estimates are often way off the actual figures, and so it usually creates volatility for GBP/EUR rates. The current expectation is +103,000. Any difference and expect GBP/USD to be choppy.