Monday, 4 April 2011

Weekly Pound vs Euro/US Dollar & Economic data

In this week’s Report:

• Pound hits 5 month low vs. Euro
• EU and UK Interest Rate decisions this week
GBP/USD falls from 14 month high
• 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; 5 month low

Sterling fell to a 5 month low vs. the Euro last week, on expectations that interest rates in Europe will rise faster than in the UK and talk of month-end demand from central banks. Sterling’s falls were exacerbated by sterling selling against the Australian dollar, related to insurance payments for flood damage in Queensland.

"There is a sense that the UK economy is going through a ropey phase and selling in sterling has been very steady since last week," said Michael Derks, currency strategist at FXPro. "Further gains look likely while the market embraces the more positive aspects of the euro area periphery story, ECB tightening and softening UK data," he said.

Following Thursday’s movement, the euro was broadly firmer as above-forecast euro zone inflation cemented the case for higher interest rates from the European Central Bank (ECB). Markets see the tightening cycle starting in April.

Manufacturing growth slowed more than expected in March but companies still ramped up prices at a record rate to cover rising costs, a survey showed on Friday. The Markit/CIPS manufacturing PMI headline index fell to a five-month low of 57.1 in March from a downwardly revised 60.9 in February. Analysts had expected only a slight dip to 60.6.

On a brighter note for sterling, Housing prices increased and the manufacturing survey also showed that companies' raw materials costs had continued to rise in March, albeit at a slightly slower rate than in February. And companies continued to take on new staff, though not at February's record pace.

Rising job creation, a surprise rise in house prices and further growth in the manufacturing sector are encouraging signs. However, the economic outlook is still uncertain and the slowdown in the pace of expansion in the sector will not ease the dilemma facing Bank of England policymakers over how to tackle persistently above-target inflation, without harming economic recovery.

The pound fell off the back of the figures, but analysts noted that the manufacturing sector was still on course to make a strong positive contribution to first-quarter GDP growth, which may work to ease concerns of the UK slipping back into recession.

Money markets have pushed back expectations for the first rise in interest rates from a record low 0.5 percent to August from May, largely as a result of weak news on consumer activity. "The Monetary Policy Committee's balancing act between growth and inflation has perhaps become even more precarious," said Markit economist Rob Dobson. Markit said the slowdown in demand was most pronounced in the consumer goods sector, which was virtually stagnant, and indicated a fall in domestic orders for such goods.

Rising inflation, muted wage growth and the prospect of government spending cuts have hit consumer morale and dented retail sales, spelling bad news for an economy which has historically been heavily reliant on household spending.

On a final note, to ensure we don’t get too carried away with ambitions of recovery, we have to bear in mind that the manufacturing sector has recorded strong growth over the last year but in reality, it accounts for just 13 percent of total economic output…

Sterling vs. US Dollar;

Last week saw a relatively quiet week for the GBP/USD currency pairing, as investors seemingly took a step back to take stock following recent high volatility between the two powerhouse currencies. That said the early part of the week saw the pairing hit an 8 week low for a short period of time but this was short lived as Sterling then found support below the 1.60 level pushing marginally higher as the week progressed.

With little happening last week most eyes will be firmly on the key data releases of this week which promise to cause turbulence in the markets. The UK faces a potentially tough week as we await decisions on interest rates and GDP estimates, both of which are key indicators of economic health.

We expect Thursday’s interest rate decision to show no change for the UK with the bank of England likely to hold at 0.5% for the 25th consecutive month. This will no doubt push investors away from Sterling as it seems we are still no closer to raising rates which is likely to make the Pound a less attractive option. It is known that the USD is seen as the world’s safe haven currency and uncertainty for the UK and GBP respectively will no doubt drive funds into the Dollar.

The interest rate decision however could end up bearing little or no relevance on the markets this week if Wednesdays GDP estimate shows a negative reading. The basics of the decision are as follows, a negative figure means that the UK would be set to officially re-enter a recession when the official release is made on 27th April. This would almost certainly be catastrophic for the Pound and make any purchase of foreign currencies across the board that much more expensive in the weeks and months to come.

Close contact with your account manager this week is as important as we have seen in recent times. If you have yet to open a trading facility with us you can do so by clicking the link below, and a dedicated currency trader will be in touch to explain the many tools at our disposal to maximise your trade. We offer expert market knowledge to help make the best decision for your individual needs.


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
For the UK today we see construction PMI. In the Eurozone we have various releases including Investor confidence and Inflation data. If high this could reinforce the case for a rate hike later in the week from the EU, so GBP/EUR rates may push lower.

Tuesday
Today’s UK data comes in the form of the Purchasing Managers Index (PMI). This is an inflationary measure and so can impact on interest rate movements. From the EU we have Retail Sales which is seen as a barometer of consumer confidence. Later in the day the US releases the minutes from its interest rate decision.

Wednesday
We have a UK GDP estimate this morning so we expect some GBP volatility. There are also GDP figures released from the Eurozone this morning, so expect GBP/EUR to change should the figures be different to forecast.

Thursday
Today is arguably the most important of the week for GBP/EUR. We have an interest rate decision from both the UK and the EU. Markets expect the UK to leave rates on hold at the record low of 0.5%. In the EU however we could see a rate hike, as hinted by the ECB president last month. If rates do go up, expect the Euro to strengthen and GBP/EUR rates to fall. From the US we have various measures of unemployment and jobless claims.

Friday
We end the week with German Trade balance figures, and as the largest economy in the EU this could affect the value of the Euro. There are also further inflation measures for the UK and unemployment figures from Canada released today.


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