Monday, 17 January 2011

Sterling vs. Euro & US Dollar Forecast 2011

In this week’s Report:

• Sterling vs. Euro Forecast
• Analysis of EU Bond Auction and effect on Euro
• Sterling vs. US Dollar Forecast
• Round-up of weekly economic data releases

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

Sterling vs. Euro falls from 4 month high

This time last week, Sterling Euro rates were approaching a 4 month high, hitting €1.2060 at the peak. However towards the end of last week this upward trend in rates was over, and we saw a big decline in rates. In this week’s report we look at why exchange rates moved up so far, and what caused it to fall back away so quickly.

Eurozone Debt & Bond Auctions

The main reason for the recent upward trend in currency rates was due to a very weak Euro. Following the bailout of Ireland and Greece, many people thought that Portugal and Spain would also need assistance. It was this fear that had been weakening the Euro during the start of 2011, helping push rates to their best in over 4 months.

However, last week Portugal and Spain held a bond auction where they successfully managed to raise significant amounts of finance, allaying fears that another bailout would be necessary. The two bond sales suggest that investors are somewhat more confident about the countries' ability to pay their debts, and as a result the Euro has regained significant strength pushing GBP/EUR rates down.

After markets realised there was no problem raising capital through Bond auctions, investors were quick to re-invest in the single currency and it was this demand that caused a fall in GBP/EUR rates of more than 2%.

Also helping to strengthen the Euro were comments by European Central Bank (ECB) president Jean Claude Trichet saying that they would have no problem raising interest rates to combat price inflation. Higher rates represent a higher return for investors, and so this also spurred investment to the Euro creating demand that strengthened the single currency. So the double whammy of possible higher interest rates in the EU combined with more confidence in EU countries being able to raise finance has pushed rates lower.

Going forwards, where rates may move in the coming months is hard to predict. Of course rates could head lower if UK data is poor and markets remain confident in the Euro. However doubts remain over the long-term structural problems in the Eurozone and so we could see further Euro weakness.

In volatile times like this when markets could move either way, it’s important to know the options available to you to ensure you don’t end up paying more for your currency than necessary. Foremost offers various market orders such as Forward contracts that allow you to fix rates even if all your funds aren’t available. We also offer Stop Loss orders which protect you against a downturn in rates while allowing you to still take advantage of any gains.

Contact us today for a free consultation to discuss the options we offer. The alternative is leaving things to chance and simply hoping rates will move your way; hope is not a reliable economic tool and so take advantage of Foremost’s market knowledge to help you budget effectively and take control of the cost of your currency purchase.

Pound vs. US Dollar hits 1 month high

Despite the fall last week vs. the Euro, against the US Dollar Sterling actually went up hitting a 1 month high at the end of last week. This is because both the EU and UK may now have much higher interest rates than the US, and both currencies have gained against the US Dollar. It’s simply the case the Euro outperformed Sterling so that’s why GBP/EUR rates fell but GBP/USD rates rose.

The dollar also came under pressure after a jump in weekly U.S. jobless claims pointed to a lacklustre economic recovery. Also having an impact were investors selling US Dollars for Euros, helping to weaken the Dollar further creating the best buying opportunities so far this year.

So it’s the chance of interest rates going up in the UK that is the reason for rate against the US Dollar rising. As interest rates are so low in the US, the better return for investors elsewhere has caused investors to move funds creating demand in the market.

A BoE rate rise would give the pound a clearer yield advantage over the dollar, while higher rates in the euro zone would increase the advantage of euro rates against many major currencies.

As we go through 2011, analysts will be closely watching economic figures for the EU, UK and US to try and gain an understanding how the economies are performing relative to each other. Stronger economies that are recovering faster will benefit from a stronger currency. As there is so much turmoil in the financial markets at the moment, it’s impossible to predict if rates will continue to go higher.

What we can say for sure is that at the moment rates to buy US Dollars are the highest for over a month. If you need to purchase US Dollars you may wish to consider locking in rates with a Forward contract to protect you against a potential downturn in rates. Contact us today to discuss the contract types we offer.

Weekly Economic Data that may affect exchange rates

Below we list the main data released for the week ahead. The implication of these will differ depending on the currency you need to buy or sell. For a free consultation on how the below released could affect your currency requirement, open an account with us today. This is free to do, doesn’t obligate you in any way, and simply means you can have a free consultation from a currency expert.

Monday
Today is a little quiet data wise due to a US market Holiday. We do have some house price data for the UK from Rightmove, showing how this sector is performing. House prices are a good barometer of how the economy is faring, and so can have an impact on the value of the pound.

Tuesday
Further UK house price data today, this time from the Institute of Chartered Surveyors (RICS) and a separate measure from the government. We also have a measure of UK consumer confidence from Nationwide. Staying with UK data, we also have various inflationary measures in the shape of the Consumer Price index. There is also a measure of UK Retail Sales today, also a reflection of consumer confidence.
We also have an interest rate decision from Canada, and some confidence measures from Germany and the United States.

Wednesday
UK Unemployment measures are released today, and we expect a total of 7.9%. More than this and Sterling may fall. From the EU there are measures of construction output, showing how this sector is performing. From the USA we see various measures of housing including Building Permits, Mortgage Applications and Housing Starts. There are some inflationary measures today from New Zealand & Australia also.

Thursday
Today is quite quiet on the UK side, with the only data of note an Industrial trends survey. Elsewhere we have Consumer Confidence measures from the Eurozone and a monthly report from the European Central Bank. Watch for any further comments on higher interest rates that could push GBP/EUR down. From the US there are further home sales data released in the afternoon.

Friday
To end the weak we have UK Retail Sales, which may have taken a hit due to the weather conditions last month. There is also a measure of Public Sector borrowing from the UK today. Generally speaking, if net bowing is negative then this will be positive for Sterling.

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