Monday, 28 March 2011

Weekly GBP/EUR & GBP/USD Forecast

In this week’s Report:

• Sterling vs. Euro round up
• Where will GBP/USD rates move in the coming months?
• Round up of the week’s data that may affect rates

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


Sterling vs. Euro

In the build up to last week all eyes were focussed on George Osborne’s budget on Wednesday, however, in what was a busy week it was UK retail sales that most affected Sterling’s performance against the Euro.

Monday started well for the UK with Rightmove house prices showing a slight increase although movement in the market is mainly limited to the top end. The market’s reaction was limited as traders were waiting for Consumer Price Inflation (CPI) out on Tuesday.

Consumer Price inflation is a key measure of the economy that looks at the change in prices of consumer goods and services purchased by households. February’s CPI figures were expected to show a growth from 4% to 4.2% but in fact came out better at 4.4%.

As expected the Pound began to gain against the Euro as the figures were interpreted that an Interest rate rise in the UK is more probable. However there were some in the market, including currency analysts at HSBC, who believed the Pound was overpriced, saying rising inflation at a time of fiscal austerity was a reason to sell the Pound, rather than buy. As expected this curbed Sterling’s performance somewhat.

On Wednesday the Bank of England's Monetary Policy Committee maintained its 6-3 split in favour of keeping rates on hold this month, seeing no major change in the medium-term outlook despite the CPI data on Tuesday. At lunchtime on Wednesday George Osborne’s budget unveiled cuts in the 2011 growth forecast to 1.7 percent from 2.1 percent as well as commenting that soaring oil prices mean inflation will remain between 4 and 5 percent this year. As Alejandro Zambrano, market strategist at FXCM commented, ‘Low growth and high inflation does not make good news for the currency’.

Despite the budget, Sterling remained relatively stable against the Euro and it wasn’t until disappointing UK retail sales were released on Thursday that we saw the Pound start to lose value. Sales in February fell 0.8% on the month against forecasts for a smaller decline of 0.6%, sharply slowing the annual rate of growth to 1.3% from a downwardly revised 5.1% in January.

Added to this, the ratings agency ‘Moody's’, said that Britain's triple-A credit rating could be at risk if slower growth makes it harder for the government to rein in its budget deficit.
These two pieces of information effectively threw the Pound into freefall against the Euro throughout Thursday and well into Friday with the Pound falling to its lowest level in 2011.

The Pound’s fragility against the Euro was based on concerns over the state of the UK economy and uncertainty as to when rates in the UK will be raised which BOEWATCH suggests is more likely to be in August rather than July as previously thought. Whilst in the Eurozone, Trichet confirmed he planned to press on ahead with the raising of interest rates potentially as soon as April despite deep concern over some of their member states, such as Portugal, who are looking almost certain to require a bailout from the European Central Bank.

Sterling vs. US Dollar;

The market is increasingly becoming nervous about domestic economic conditions. A slowdown in the UK economic recovery, coupled with rising inflation, is complicating the Bank of England’s job. Do they raise rates to decrease inflationary pressures and risk completely upending the economic recovery, or do they keep their fingers crossed and leave interest rates low on the hope that inflation is temporary and likely to start receding towards the end of the year? Thursday’s wider-than-expected drop in UK retail sales signalled to the market that the BoE will be inclined to leave interest rates low for a while longer.

For these reasons, coupled with the fact that investors scaled back their appetite for risk, the U.S. Dollar rate fell towards the end of the week. Their final 4Q GDP report showed economic activity expanded 3.1% during the last three-months of 2010, higher than initial forecasts for a 2.8% expansion in the growth rate, while personal consumption increased 4.0% versus earlier expectations for a 4.1% rise. We saw a small reaction in the major currencies, with the U.S. Dollar gaining ground following this release.

So why is the notoriously safe haven greenback falling against other major currencies when there was a drop in investor sentiment this past week? Understanding the Dollar’s performance is critical to determining what direction it takes going forward.

A simple assessment of the Dollar’s performance shows that the greenback has been steadily losing its position as the world’s reserve currency and will continue to do so into the future. The Dollar is also losing its place as the most traded currency but the need for liquidity during panics rises above such speculation. What’s more, the fact that a considerable amount of US capital, supported by Fed stimulus, was invested outside the nation’s markets means that there is a source of funds that can lift the Dollar through repatriation or risk aversion.

If you need to buy or sell US Dollars, click below to open a trading facility with us today. It’s free to do without any obligation, and simply gives you access to our commercial exchange rates and market knowledge.

Weekly Economic Data that may affect exchange rates

Below we list the main data released for the week ahead. For a free consultation on how they 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
Most data is US based today, with Income and home sales data in addition to expenditure data. From New Zealand there are Trade Balance figures showing Imports and Exports.

Tuesday
Today is important for UK data, with GDP figures at 09:30am. We also have Mortgage approval figures and Money Supply data, so we expect some volatility for Sterling today. We also have some confidence measures from Germany and the USA today.

Wednesday
More EU data today with Consumer and Economic confidence figures released at 10am. Later in the day we have US mortgage applications and a speech by the FED. At midnight Gfk release a measure of consumer confidence that is expected to be low.

Thursday
The last day of the month, and we have a raft of data from Australia including private sector credit and Retail Sales. UK House prices are also released this morning from the Nationwide and there is a credit conditions report from the BoE. EU data today comprises of Retail Sales and unemployment from Germany.

Friday
We have Halifax house prices from the UK in addition to some inflation data. The EU also has lots of inflation data today in addition to unemployment. There are also some unemployment figures from the USA today.

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