Tuesday, 31 May 2011

Weekly GBP/EUR & GBP/USD Forecast Outlook


In this week’s Report:

• EU debt worries weaken the Euro significantly
• Concerns remain over UK growth and economic recovery
• Interest Rate speculation still the main driver for 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;

Sterling made strong gains throughout the week against the Euro broadly off the back of continued market commentary regarding the problem of the debt crisis in Greece. At its best the Pound gained almost 2 Cents against the Euro from where it started at the beginning of the week:
















The pound's rise came in spite of data confirming Britain's economy made a sluggish start to the year as household spending saw its sharpest quarterly fall in almost two years reinforced the view that UK interest rates were unlikely to rise soon.

Problems continued for Greece and the Eurozone following comments made by Eurogroup President Jean-Claude Juncker who said that should the International Monetary Fund not pay its next tranche of aid to Greece, there would be pressure on reluctant European Countries to do so.

Commenting on the GBP/EUR cross, Ankita Dudani, currency strategist at RBS said "It's a combination of news on the euro zone, including Juncker's negative comments on Greece. There's a lot of uncertainty about what a debt profile would contain and how far it may go -Sterling, on the other hand, doesn't have the same baggage."


She added that compared with the euro, the UK was in a better economic position given that it had a single monetary and fiscal policy unlike the euro zone, which is suffering from increasing political tension among its 16 member nations.


Whilst Sterling has indeed been benefiting from problems within the Eurozone, Euro purchasers should remain somewhat cautious about the medium to long term outlook for the pairing as Sterling still faces many downwards risks including PMI inflation data as well as the fact that Eurozone rates are still expected to raise again this year whilst UK rates are not expected to move until at least February next year.


This recent movement that Sterling has benefited from has far more to do with concerns within the Eurozone rather than fundamental Sterling strength. The UK economy is still a long way from being described as ‘powerhouse’ as it continues to battle rising inflation and slow growth – both of which will leave Sterling vulnerable once the furore with Greece no longer dominates the financial headlines.

Sterling vs. US Dollar;

Last week Cable hit a low of 1.6059 on Tuesday but just when it looked like we could see sub 1.60 rates for the first time since January, the US released a wave of worse than expected data forcing the rate back up to a high on Friday of 1.6463:




















Firstly there was a dip in US corporate profits, caused by falling consumer spending as energy prices are still rising, which has just stood to increase unease about the outlook for the US economy. This was backed up by Thursday s releases where we saw jobless claims increasing to 424,000 after it was below 400k as recently as March, and most importantly the initial US GDP reading showed 1.8%.



While this was no different to the previous reading, the markets had been expecting a growth to 2.2%, which was quite disappointing and weakened the Dollar further as it looks like it could deter the FED from raising interest rates until next year.

Closer to home, UK releases were surprisingly upbeat with a rise in consumer confidence and house prices while economic growth remained steady at 0.5%. Similar readings are expected next week so even if the current trend in GBP/USD doesn’t continue, we should at least see some stability in the market for the time being.

The key driver for Sterling is the interest rate expectation; currently most analysts don’t expect to see a rise in the base rate until at least the 4th quarter this year and this should be backed up by the fact that Andrew Sentance has now stepped down from the Monetary Policy Committee. He was the first of the 9 member rate setting team to call for an increase in the lending rate as early as June 2010 so his resignation would mean that there are currently only 2 members calling for a hike.


However, Paul Tucker, who has been voting to hold rates recently, said in a speech on Thursday that he was concerned over inflation. These comments suggest that he could be ready to switch to favour an interest rate increase as early as next month and if any other members are in the same boat then the outcome on 9th June could be finely balanced. On the flipside, a 7-2 split at the meeting could force the Sterling-Dollar cross back down towards the lows seen last week.

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
It’s was a Bank Holiday in the UK and US yesterday, however there were some Canadian GDP figures released.

Tuesday
There is no UK data today. The main releases are from the Eurozone; Unemployment, Inflation data and German Retail Sales. From the USA we have Consumer Confidence and inflation numbers. For Canada we have an interest rate decision, currently the rate stands at 1%.

Wednesday
It’s Australia’s turn for GDP figures today. For the UK we will see PMI manufacturing and Mortgage Approvals, that often causes volatility for Sterling. From the EU we have some inflation figures, which will give indications of interest rate movements. From the USA we have unemployment data and mortgage approvals.

Thursday
Further jobless figures from the states today could cause GBP/USD volatility. The only UK release of note is PMI construction. Given the construction sector is dragging down the economic recovery in the UK, the numbers could well have an impact on the value of the Pound.

Friday
UK data today is Purchasing manager Index, and the EU also has the same release. It’s an overall indicator of economic health for both zones. The US has a raft of employment figures, including Non Farm Payrolls that often causes big volatility in GBP/USD, as it’s notoriously difficult to forecast.

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