Monday, 27 June 2011

Weekly GBP/EUR & GBP/USD update forecast

In this week’s Report:

• Bank of England minutes causes fall for Sterling
• Chance of further Quantitative Easing for the UK
• Greek debt keeps Euro weak, limiting GBP/EUR drop
• 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 finished last week over half a cent down against the euro from the start of the week but almost 1 cent better than the lowest point of trading midweek. Last weeks key UK data and indeed the biggest drop came following the minutes of the Bank of England meeting, held at the beginning of the month, which of course showed a 7-2 split in favour of keeping rates on hold.











However, with exit of Andrew Sentence from the committee and the addition of Ben Broadbent the minutes were interpreted as being particularly dovish. As a result, the money markets are now not pricing in a BoE rate rise until July or August 2012, while only a few months ago the expectation was for two rate rises by the end of this year.

Sterling’s performance was further muted by signs the Bank of England could yet be inclined to embark on another round of quantitative easing, and this has driven the pound lower this week with many investors forced to unwind more bullish positions.

Euro confidence was bolstered on Tuesday when Greece’s socialist premier ‘George Papandreau’ was given a vote of confidence by the Greek Government making way for a new wave of austerity measures which were subsequently agreed by the EU on Thursday. Mr Papendreau now needs to push these measures through his own parliament which will include a sale of $70 billion of state assets. Despite the dire straits Greece find itself in, the Euro held firm against Sterling as the events were interpreted as a scene of solidarity on behalf of the European community.

Adam Cole at RBC Capital Markets suggested that Sterling’s position is unlikely to change unless the market starts to point towards better growth figures in the form of Q3 GDP figures - If this happens then it may be enough to begin to mute the doves in the MPC and see Sterling make some headway against the single currency.

This however is not the case at the moment, and last week was yet another of Sterling being bullied around by the Euro on European data, and probable delays in interest rate rises in the UK. This week’s key UK data release is the final Q1 GDP figures. The market expects to see 0.5% growth, however keep in close contact with us if you are buying or selling Euros, as any deviation from this figure (especially negative) is likely to cause some volatility in the market. Discuss ‘Stops’ and ‘Limits’ as a way of maximising your position whilst at the same time protecting yourself from any potential drops in the market. If you haven’t already, make a free enquiry with us now by clicking here.

Pound vs US Dollar Forecast

Fed Chairman Ben Bernanke’s second ever press conference given last week seemed to rule out almost entirely the prospect of further policy stimulus, strengthening the US Dollar even as the US economy is going through a soft patch and the unemployment rate has been rising. This has pushed GBP/USD rates lower as the chart below clearly illustrates:











The Fed believes that the factors weighing on growth are very much temporary, including higher commodity prices constraining consumption and disruption from the Japanese earthquake to the supply chain that has hit industrial production. It also believes the pace of recovery will pick up later this year.

However, it did sound a note of warning about inflation saying that it had noted the pace of price increases recently and it would continue to "pay close attention to the evolution of inflation and inflation expectations." This was considered more "hawkish" than some had expected, however, like the Bank of England, the Fed thinks that inflation will eventually moderate when commodity prices fall.

However, while we think a floor has been put in for the dollar for now there are many reasons for scepticism that the greenback rally will continue... Firstly, the Fed could change its mind if the economic situation deteriorates, so we need to see how the data pans out over the next few months. Secondly, the US still faces a political wrangle to get Congress to agree to raise the debt ceiling so the US can avoid bankruptcy later this year. Although we think the debt ceiling will be extended, the US's massive $14 trillion debt load means that we are unconvinced at the extent the dollar can rally. With debts that big the US needs a weak currency to boost exports and to create a little bit of inflation; thus bringing down the size of the debt in real terms.

On Friday, Cable (GBP/USD) went below $1.60 for the first time in 3 months; could this be the beginning of the much speculated rally, or just a temporary trough? Could the Greenback realise its current potential by rising further against a weak pound? If you are buying or selling USD it is an important time to be keeping abreast of what's happening in the markets. Click here to send us an enquiry, and have a free consultation.

Weekly Economic Data that may affect exchange rates

MondayFrom the UK today we have Nationwide Housing Prices, which is an indicator of the health of the UK housing market. From the EU we have Retail Sales from Germany, the largest economy in the EU. It’s considered a barometer of EU consumer confidence. From the USA we have Personal Expenditure data, which is a significant indicator of inflation and could affect future interest rates.

TuesdayGross Domestic Product is the main UK release today, which is a broad measure of economic activity. From the Eurozone we have the Consumer Price Index from Germany. This is an inflationary measure and if high could increase the chance of an EU rate hike, pushing GBP/EUR lower. Consumer Confidence from the USA is the major release from across the pond.

WednesdayUK data today is in the form of Consumer Credit, Mortgage Approvals, Consumer Confidence and Money Supply. Recent UK data has been very gloomy, and further poor data could push Sterling lower. From the Eurozone we have measures of economic, industrial and consumer confidence all of which could affect GBP/EUR rates.

ThursdayUnemployment data from Germany today is the main release from the Eurozone. The UK has little data out today, however there is a credit conditions report from the BoE. This studies the risk attitude towards UK banks, and can indicate economic growth (or lack thereof!). We also have jobless figures from the USA and Gross Domestic Product from Canada.

FridayWe end the week with a raft of inflation data from the UK and EUR, in the shape of the Purchasing Managers Index. This can indicate where interest rates may move in the coming months, and given the interest rate differential has been a big driver in GBP/EUR rates of late; markets will be paying close attention to the figures. From the USA we have some Manufacturing and Construction data.

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