Monday, 23 May 2011

GBP/EUR & GBP/USD Forecast, (Weekly outlook)

In this week’s Report:
  • Better UK data overshadowed by growth worries
  • Inflation up, but GBP gains limited
  • Interest rates continue to drive exchange rates
  • 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;

Despite an interesting week for data in the UK, Sterling’s upside pressure against the Euro remains stunted over concerns for the long term growth of the economy. The pound started the week down against the Euro after the previous week’s growth figures had indicated that the UK interest rates would lag behind the Eurozone despite continued problems with the debt crisis in Greece and the bailout:










Tuesday saw the release of the UK Consumer Price Inflation figures for April where the year on year reading was up at 4.5% for 4% previously and significantly higher than the 4.2% that was expected. The movement was largely due to the rise in food prices and alcohol and tobacco duties, however, despite the figures the GBP/EUR cross only moved 30 pips which were quickly lost.

Furthermore, Mervin King’s letter to the treasury stated that an attempt to bring inflation back to target of 2% too quickly would harm the economy and would in fact risk undershooting the target. His comments highlight the Bank of England’s difficulties of having to balance rising price pressures with an economy recovering at a terribly slow pace.

Midweek Sterling slipped 0.6% against the single currency following an unexpected rise in the number of people claiming unemployment benefit and the minutes of the previous Bank of England meeting. The BoE showed a 6 -3 split to keep rates on hold with two of the ‘hawks’ , Martin Weale and Spencer Dale commenting their decision was ‘finely balanced’. The third ‘hawk’ Andrew Sentance cast his final vote before his departure from the committee and will be replaced by Ben Broadbent in June. Broadbent has already commented that he does not share Sentance’s hawkish outlook and this is likely to be reflected by a more dovish committee and a series of 7 – 2 splits in the coming months.

Sterling’s performance continued to be somewhat subdued on Thursday after positive results from UK retail sales for the month of April. Sales rose by 1.1% up from expected 0.8% with the reasons being cited as extra holidays with the Royal wedding as well as record high temperatures. Sterling gains made immediately after the results were soon lost again after it was broadly interpreted that these retail figures would be unsustainable month on month and compounded by the fact that they have no impact on the outlook for UK interest rates.

Sterling ended the week largely unchanged and with its performance capped somewhat because of the outlook for UK interest rate changes. Despite the continuing pressure on the Eurozone’s stance toward the Greek bailout, it is widely expected that the ECB will raise rate twice before the BoE does, which continues to be an underlying reason for Sterling’s weak performance and why exchange rate changes between the GBP/EUR cross are largely driven by Euro data rather than Sterling data.

Sterling vs. US Dollar;
Last week was a quieter week than many of the recent weeks for cable, with neither currency able to continue gains it had made over the other in the last 2 months, for example when the cross approached the 1.70’s in the first week of May and yet had been in the 1.50’s as recently as March.










On the whole, since that spike in early May, Sterling has come under fairly consistent pressure in this cross, as a general consensus remains that the Bank of England will maintain interest rates at record lows in the short and medium terms, to maintain an environment that in the very least is not inhibitive of economic growth. This consensus exists in spite of an increased inflationary pressure in the UK; Tuesday’s figures showed that annual core inflation (CPI) figure had spike to 4.5%, up from 4% last month and now at the highest point since October 2008. Indeed you can see below the current and historic CPI and RPI levels in this handy chart:
















There was some volatility mid week as the Bank of England minutes on Wednesday drove the cross to 6 week low as the minute’s supported the consensus mentioned above. It was a small shock therefore when Thursdays retail sales figure release was better than expected as you heard about in today’s Euro report, bringing cable back into the $1.62’s where the Interbank buffeted for a high proportion of last week.

The future of the cross is still very uncertain, with the short term difficult to foresee. Many banks and brokers still feel the long term future will see higher exchange rates, mainly based on the belief that as the tentative global recovery gathers pace, the exit from risk aversion will see the Dollar retract as investors flee the global safe haven in the search for higher yield.

Indeed although the B of E is dovish at present and unlikely to raise rates in the coming months, most believe they will raise rates before the Fed. So long term it seems fair to say that UK buyers of the dollar have better times ahead, but that when these times appear is hard to call. Indeed it would be remiss to say things are rosy as any scares in the world economy can as we have seen very recently push global investments into the Dollar and retest the lows on cable.

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
Today we have much data from the EU that could affect GBP/EUR rates. Firstly from Germany we have inflation data which could give indications of interest rate movements in the EU. Secondly we have Industrial orders and EU wide inflation figures also; expect EUR volatility today.

Tuesday
Staying in the EU, today we have German Business Climate and confidence measures. From the UK we see a release regarding Public Sector borrowing. This measures the financial deficit in UK national accounts. It negative, this should be positive for Sterling and vice versa. There are Home Sales data figures from the USA today.

Wednesday
Today the UK releases GDP data. This is considered a broad measure of UK economic activity and often has a big impact on Sterling exchange rates. It shows it the economy is growing and is a significant release. Also today we see German consumer confidence.

Thursday
A quiet day for EU and UK data. Main releases are from the USA – Gross Domestic Product & Jobless Claims. The USD has been quite weak of late, with some analysts expecting better data. If so, expect GBP/USD rates to drop away.
Friday
We end the week with further inflation data from Germany, which will give indications of possible interest rate movements within the EU. From the USA we have Consumer Sentiment, Personal Income & Expenditure, in addition to some Home Sales data.

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