Monday, 4 July 2011

GBP/EUR forecast, GBP/USD outlook, weekly data

As usual for a Monday, today we'll have a detailed weekly look at Sterling vs Euro forecast, Sterling vs US Dollar outlook, and the weekly data that may affect exchange rates:

In this week’s Report:

• Pound vs. Euro drops to 18 month low
• EU Interest Rates likely to go up this week
• Greek austerity plan agreed, affecting EUR and USD
• Round up of the week’s data that may affect rates

Sterling vs. Euro;

The GBP/EUR rate plummeted last week to the lowest since March 2010, falling against a basket of currencies as well as the Euro. Britain’s currency slid against the Euro in particular on predictions that a faltering economy will limit the policy makers’ scope to raise interest rates, as the European Central Bank lifts borrowing costs to curb inflation. A report on Thursday showed U.K. consumer confidence fell more than economists forecast in June while the Bank of England’s Credit Conditions Survey said mortgage demand is predicted to drop in the third quarter.











It was a dramatic week with market sentiment swinging from worries that Greece would go bankrupt to relief that it would get through the crisis, against a backdrop of violent protests and general strikes over austerity steps. The Greek parliament approved a detailed austerity plan on Thursday, paving the way for 12 billion euros of international aid.

“The market is bullish on risk and looking to buy euros,” said Paul Mackel, director of currency strategy at HSBC. “The Greek issues still linger, but there is a bit of calm now with the markets' focus on data.” Barclays Capital pushed back its forecast interest-rate hikes for the UK, saying the central bank will now most likely keep its main rate unchanged until May 2012.

The bank, which previously forecast a rate increase in November, said the change reflects weaker than previously expected economic growth and recent comments from central bank officials. This is in start contrast with the euro zone where even with weak manufacturing surveys, little changed regarding strong expectations that the European Central Bank would raise interest rates next week.

Sterling has fallen 9 percent in the past 12 months, making it the second-worst performer among 10 developed-market currencies after the U.S. Dollar, according to Bloomberg Correlation-Weighted Currency Indexes.

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Sterling vs. US Dollar;

It looks like the US market holiday for Independence Day today will mean a continuation of the relatively flat trading range for Cable that we saw over the last week; the pair hit a low on Tuesday of 1.5923 with a high Thursday of 1.6117.











Media & market attention was mainly focussed on the continuing debt problems in Greece and whether or not the austerity measures would be passed by the Greek parliament. Both the US & UK economies are struggling so both currencies are weak on paper, but how the EU handles the spiralling debt issues within its smaller nations will help to determine how the GBP/USD exchange rate moves.

The US Dollar is the world’s safe haven currency (for now) and as the global financial problems persist, risk-averse investors will continue to plough money into the Greenback, keeping the Dollar strong. If we get to a point where the crisis starts to ease then we should see a return of risk appetite whereby investors will start to put money into perceived risky assets (of which the Pound is one), taking them away from the Dollar and that should start to push the rate back up again.

There were still some data releases last week and we have seen confirmation that UK mortgage activity and consumer spending is still well below levels seen before the credit crunch took effect. With credit conditions this subdued, it continues to highlight the struggle the UK economy is facing and further strengthens the Bank of England’s argument for keeping UK interest rates at their current low of 0.5%.

Barclays Research is among a number of investment institutions forecasting that they will remain this low until 2nd quarter 2012. Without an interest rate hike there isn’t much on the horizon that looks like it will give the Pound a much needed boost, but we have to remember that the US is in the same boat, and some ratings agencies are starting to warn about the risk of the world’s largest economy defaulting on its debts. Unless the government can push through a $2.5 trillion increase in the debt ceiling, the Dollar could be in for a very rough time.

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Weekly Economic Data that may affect exchange rates

The week starts very quietly, but Thursday and Friday both have key releases that could upset the currency markets. Below are the main releases for the week ahead. For a free consultation on how these releases 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.

MondayVery little data today due to US Markets being closed for Independence Day. In fact the only real data of note is an investor confidence release from the EU.

TuesdayAgain, a very quiet day for fundamental data. We have an interest rate decision for Australia, and factory order data from the USA. From the EU we have Retail Sales and Services PMI.

WednesdayToday we have EU Gross Domestic Product (GDP) figures. This could show growth in the EU, and so expect volatility for GBP/EUR rates.

ThursdayThe busiest and probably most important day of the week. Starting in the UK, we have various measures of manufacturing and industrial production, and also a GDP estimate. We will also see the BoE interest rate decision, but we expect no change in rates. Moving to the EU, we have an interest rate decision and we expect a rise from 1.25% to 1.50%. This could well strengthen the Euro and push GBP/EUR rates lower. We also have various measures of unemployment from the US, indicating how their economy is performing.
FridayAgain pretty busy today, with UK inflation data (PPI) and German trade balance figures. Germany now has the lowest unemployment since reunification and so further good data from Europe’s largest economy could strengthen the single currency. From the US we have Non Farm payrolls. This shows how many people are employed outside the agricultural sector (as it’s seasonal) and the numbers are very hard to predict. As such, the actual result can differ to forecasts and often causes big swings for GBP/USD and GBP/EUR.

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