Monday 24th October 2011
Good morning. As always on a Monday, today we take a detailed look at the last weeks movements in GBP/EUR, GBP/USD and the weeks economic data.
In this week’s Report:
• EU debt crisis continues to affect GBP/EUR rates
• European Leaders hold summit to discuss solution
• Further Quantitative Easing possible for the UK
• Round up of the week’s data that may affect rates
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Sterling vs. Euro;
Sterling began the week at a five-week low versus the Euro on speculation the European Union will decisively address the region's debt crisis this week. Sterling fell as low as 1.1360, its weakest since early September.
Surprise inflation data showed UK consumer prices rose 0.6% last month. That took the annual rate of consumer price inflation to 5.2%, a three-year high. The higher inflation was due to soaring utility bills and not really a sign of increased economic activity. Instead rising prices are likely to further depress consumer spending while fiscal austerity measures also impact growth prospects and further complicate the task ahead for UK politicians and policymakers keeping concerns about stagflation very much alive. Stagflation combines rising prices and slow economic growth, historically a mix of weak growth and high inflation is negative for a currency.
On Wednesday the BoE's October meeting minutes showed policymakers voting unanimously to resume quantitative easing (QE), and considered injecting even more than the 75 billion pounds agreed. In a speech, BoE Governor Mervyn King defended the decision to launch another round of quantitative easing, citing a slowing world economy, especially in the euro zone, as threatening the recovery of the UK economy. “The minutes reinforce the view that the BoE is really concerned about the international environment and they stand ready to do more QE rather than less," said Kiran Kowshik, currency strategist at BNP Paribas.
Sterling received a late boost on Friday as rumours of a divide between France and Germany emerged ahead of an EU Summit designed to deliver a solution to the debt crisis. Despite the climb, Sterling and other perceived riskier currencies could be vulnerable to shifts in risk sentiment in the run up to the EU summits which Policymakers hope will make progress in tackling the euro zone debt crisis however remain deeply divided.
So, what now for Sterling and Euro? Well, The Bank of England seems to be prioritising growth, which leaves the door open for more QE, which risks devaluing the currency further. The EU summit which took place yesterday and concludes on Wednesday could result in a deadlock and if there is no resolution to the Eurozone debt crisis we could see the Euro fall.
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Sterling vs. US Dollar;
The start of last week saw Sterling fall 0.25% against the US Dollar after Germany surprised the market by saying that there are no quick fixes to the Eurozone debt crisis.
Sterling was also weighed down by a report from Ernst & Young’s ITEM Club, which urged the Bank of England to cut interest rates to virtually zero from a current record low of 0.5%, saying that the recovery has completely stalled and that additional QE is pointless, since prior attempts failed to stimulate business investment. A separate report from the Centre for Economics and Business Research (CEBR) said that the central bank was right to expand asset purchases, warning that Britain would be at a virtual standstill until the start of 2013.
The Pound slipped further following the release of UK inflation data on Tuesday. The year-on-year UK consumer price index accelerated to 5.2%, caused mainly by the recent increases in the cost of gas and electricity. Core CPI, which strips out volatile food and energy prices, rose to 3.3%, up from 3.1% in August.
Towards the middle of the week we saw a complete reversal in Sterling’s fortunes, as investors moved towards riskier assets. After a dovish report from the Bank of England, Sterling rose on the view that a solution to the eurozone crisis would be presented at the weekend’s EU summit.
Sterling’s gains were only short-lived however, as troika leaders warned that time is running out for Greece, urging the next tranche of bailout funds be paid soon. The warning saw risk appetite fade and sent investors into the safer US dollar.
GBPUSD closed the week at a 6 week high after the Pound soared against the Dollar on Friday, rising by over 1%. Sterling was buoyed by reported demand from a UK clearer and pushed higher along with the euro and equity markets.
Last week saw all financial markets driven by continued speculation over the European debt crisis and this week promises to be extremely interesting, with a plan for the EFSF and bank recapitalisations due by Wednesday at the latest.
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Weekly Economic Data that may affect exchange rates
Monday – Today markets will be reacting to the EU debt summit held at the weekend. Also from the Eurozone today we will see a host of inflation figures that could affect interest rates in the short term. Industrial New Orders are also released from the EU, so expect volatility in GBP/EUR prices today.
Tuesday – UK Mortgage approvals are released today, in addition to current account data from the ONS. There are consumer confidence figures from Germany. Further afield we have an Interest rate decision in Canada, and Housing Prices and confidence data from the USA.
Wednesday – The only UK data today is the CBI industrial trend survey. In the USA there are various releases regarding Home Sales. New Zealand has an interest rate decision and trade balance figures that may affect GBP/NZD rates.
Thursday – Inflation figures today are released by Germany. Staying in the EU we will see Money Supply data. Of course the on-going debt crisis will continue to be the main driver in the value of the Euro. In the UK there are consumer confidence figures. In the USA markets will be closely watching the numbers released at lunchtime: Gross Domestic Product, Home Sales and Unemployment data.
Friday – A quiet end to the week with no data of note from the UK or EU. Most data is US based including inflation data and consumer sentiment information.
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