Monday, 9 May 2011

Weekly GBP/EUR & GBP/USD currency forecast

In this week’s Report:
  • Pound/Euro finally gains from it’s 13 month low
  • Euro weakens significantly after ECB comments
  • Pound vs US Dollar rates fall from 19 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;

Despite the short trading week last week the GBP/EUR cross certainly didn’t lack in volatility with the total movements between the currencies amounting to approximately 3% over the week.











Early in the week Sterling fell to a 13-month low against the euro after a raft of data releases showed a patchy British economic recovery, this in turn suggested the Bank of England would not raise interest rates soon. The pound fell to 1.1048, its lowest since March 2010, as markets continued to factor in diverging rate outlooks with further hikes expected this year in the euro zone.

Analysts said further near-term gains were likely for the euro but the currency was reaching levels that may be unsustainable. “Whilst it is possible to build a 1.08/1.06 scenario based on a strong euro and a weak pound, we do not believe these gains will last," Chris Turner, analyst at ING.

After another rocky start on Thursday Sterling rebounded from the 13-month low against the euro after the European Central Bank signalled it may not raise interest rates again as early as next month. ECB President Jean-Claude Trichet offered a much less hawkish tone on the central bank's rate outlook than markets had been expecting after April's hike, prompting traders to book profits on the euro's gains versus sterling after weak UK services data earlier in the day drove the pound lower.

Jean-Claude Trichets comments helped push Sterling a little above 1.13 Vs. Euro where it stayed to round the week off on a high.

Both the ECB and the BoE kept interest rates unchanged, but many believe the euro will regain its upper hand against sterling while the ECB continues to tighten monetary policy much faster than the BoE. Markets are now not pricing in a BoE rate hike until November or December, while many in the market see the possibility of another ECB rate rise in summer.

"Once the dust settles, the market is going to realise that the next ECB rate rise is going to come before the BoE raises rates, We might see profit taking along the way, but the euro will find a foot hold, and we'll probably see it return to 1.11 in the short term," said Richard Wiltshire, at ETX Capital.

Sterling vs. US Dollar;

Pound vs. US Dollar rates have declined from the 19 month highs we have seen in recent weeks, and since the beginning of the month rates to buy Dollars have been in decline, as the chart below clearly shows:











At the beginning of last week, the news of the death of Osama Bin Laden initially caused global markets to soar, as investors took the news as a signal to move away from traditional safe havens such as the US Dollar.

It soon became clear however that the events will not really mean and end to the ‘war on terror’, and initial gains were short lived. As a result the US Dollar has gained strength on its safe haven status, and most of the week saw GBP/USD rates in decline as the dollar became more expensive to purchase.

There was also better jobs data from the USA on Friday, with many more new jobs being created than analysts had expected, again causing USD strength and a decline in rates. Analysts said the jobs data, while encouraging, was not sufficient to meaningfully shift the outlook for U.S. monetary policy.

Volatility in USD rates at the end of last week was mostly caused by events in the Eurozone however. As outlined in the GBP/EUR report, expectations for a rate hike in the EU have declined, and this is having an effect on the value of the dollar also.

"We're still looking at the divergence in interest rate outlooks between the Fed and ECB as the primary driver in market activity over the medium term," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

Rates in the US are at a record low, while EU and UK rates are forecast to go up before those in the US. This is keeping the Dollar weak and exchange rates favourable, despite the decline last week.

So in summary, despite a retreat in exchanger rates caused by a weak pound and Euro giving some USD strength, exchange rates are still very close to the best they have been in over 18 months. This is despite Sterling being weak against most currencies. It’s the fact that poor US data and low interest rates in the US have weakened the USD even more than the pound, and the net result is relatively high exchange rates despite the state of the UK economy.

If you need to purchase USD with Sterling, you may wish to consider taking advantage of the rate while it is so favourable. To have a free consultation on the services we offer, click the banner at the bottom of the post to send us an enquiry today.

Weekly Economic Data that may affect exchange rates

Monday
Today for the UK we have House Price Data and Retail sales, although the figures are released at midnight Monday. During the day expect GBP/EUR volatility as we have confidence measure from the Eurozone in addition to Trade Balance figures from Germany.

Tuesday
There is no UK data of note; however markets will be reacting to the UK data released at midnight Monday. Most data today is from the USA; Import Prices and a survey on economic optimism.

Wednesday
Today is key for UK data. We have an inflation report from the Bank of England, a speech by Mervyn King the BoE governor in addition to Trade Balance figures. Expect a choppy day for Sterling. Germany has some inflation figures that could affect the Euro. The US has a monthly budget statement at 7pm.

Thursday
A very busy day today for economic data. We have some Employment figures from Australia and Retail Sales for New Zealand.

From the UK watch a GDP estimate at 3pm, and also a Manufacturing Production report. For both the UK and EU there is an Industrial production report for both zones; expect GBP/EUR volatility. There is also a monthly report from the European Central Bank today, so lots here that could affect GBP/EUR rates.

Stateside we have Retail Sales, inflation Data and Jobless Claims.

Friday
There is no UK data today. There are GDP figures from Germany and the Eurozone as a whole. It’s an important release that will give a view of the EU economy and so could affect GBP/EUR rates. From the USA there are some inflation figures, but given rates in the US are expected to remain low, it may not have much of an effect.


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