Monday 16th January 2011
Good morning. As always on a Monday morning, today I will give a detailed summary of last weeks movements and the Pound Sterling forecast for Euro and US Dollar, in addition to the weeks data that might affect exchange rates.
In this week’s Report:
• GBP/EUR hits 16 month high before falling back
• BoE and ECB keep interest rates on hold, more UK QE expected in February
• US Dollar remains safe haven due to EU troubles
• Round up of the week’s data that may affect rates
(For currencies other than GBP, EUR and USD, contact us for a consultation)
Sterling vs. Euro;
We began last week with Sterling trading close to a 16-month high against the euro as focus remained on the debt and liquidity problems continuing to plague the single currency.
The outlook for the single currency was clouded ahead of Spanish and Italian debt auctions later in the week which were seen as a key test of sentiment. The auctions would gauge investor willingness to invest in the troubled euro zone sovereigns. German magazine Der Spiegel reported the International Monetary Fund was losing confidence in Greece's ability to work off its mountain of debt, while Germany and France also warned Greece it will get no more bailout funds until it agrees with specific conditions and pressed for an early deal to avert a potential default.
Sterling held near the 16-month high for the majority of the week but Thursday saw a reversal in fortunes with it losing a little over 1.5% to a slightly firmer Euro. The BoE held record low interest rates at 0.5% and decided not to add to its Quantitative easing program for the time being providing some relief but analysts and traders alike expect the BoE policymakers to expand the QE program next month in order to aid a flagging economy.
UK industrial production posted a surprise fall month-on-month, increasing expectations that the economy contracted in the final quarter of last year adding to speculation that we are on the brink of another recession.
Over in Europe however the ECB President Mario Draghi was less pessimistic, supporting the Euro and said the supply of cheap money released by the ECB was helping stabilise the Eurozone economy which he expected to recover albeit gradually. The Spanish bond auction saw strong demand and sold larger quantities of its sovereign debt than expected, at a lower price than expected.
There was a slight recovery for Sterling to the end the week as the Italian Bond auction received tepid demand and could not match the Spanish auction the previous day. There were also rumours S&P would be imminently downgrading several EU countries, however at the time of writing this had not happened. This further reinforced the volatile outlook for the currency pair and if you have an impending currency requirement the best way to navigate the violent swings in the exchange rate is to keep in close contact with your FCG account manager.
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Sterling vs. US Dollar;
The Pound was relatively unchanged against the Dollar last week, trading within a range of just over 1 percent. The lack of data at the start of the week encouraged Sterling to recover to a high of $1.5471, but news on Wednesday from ratings agency Fitch that the Euro could collapse unless the ECB became more active in European sovereign debt markets caused renewed risk aversion and the gains were very quickly lost.
This news also caused the EUR/USD rate to fall to a 16 month low of 1.2660. Sterling’s losses were compounded further after figures showed that the UK trade deficit widened in November as exports fell and imports increased, however December’s figures are expected to be better.
Weaker than expected US retail sales on Thursday were preceded by a fall in UK industrial output for the second consecutive month, almost cancelling each other out but we would have expected a slight recovery in Sterling after the Bank of England decided to maintain the current amount of Quantitative Easing (QE) at £275bn. It is still widely expected however that they are playing a waiting game and the scale of asset purchases is being “kept under review”, therefore most analysts expect to see a further expansion of QE announced at the February meeting and this will more than likely keep Sterling on the back foot.
UK inflation data next week is expected to show another fall towards 4% and could show that the Bank of England have time to keep UK monetary policy loose which would keep Sterling depressed against the Dollar, especially while unemployment figures on Wednesday are expected to be poor again. While US data is showing that the economy isn’t doing as well as most of the presidential candidates would like, it still looks like developments in the Eurozone will be the key driver of Cable.
With the USD being the world’s “safe-haven” currency, further problems within the Eurozone will more than likely continue to increase demands for the Greenback at the detriment of Sterling. At time of writing this we are waiting on an announcement from another of the big ratings agencies Standard & Poors who are expected to downgrade an unnamed European nation and this has forced the GBP/USD mid-market rate back into the 1.52’s.
Anyone looking to trade GBP/USD also has events outside the UK & US to consider so it is more important now than ever to keep in touch with us to make sure you are making an informed decision when buying or selling your currency.
If you need to buy or sell US Dollars, send us an enquiry now.
Weekly Economic Data that may affect exchange rates
Monday – We kick off the new week with UK Housing Prices from RICS. In Europe, we see German wholesale prices. Markets are closed in the US for Martin Luther King Day. New Zealand has a release showing Business Confidence.
Tuesday – Things start to get a little busier today, with a host of UK inflation data out at 09:30, in addition to Retail Price Index measures. The EU also has some inflation numbers, which could affect where interest rates move in February. Staying in the EU, there are various German measures of Economic confidence. Finally, an interest rate decision in Canada rounds off the day.
Wednesday – Today sees unemployment numbers for the UK which will show the number of people out of work and claiming benefits. In Europe, there are some figures showing construction output. In the states we’ll see Inflation data, Industrial production, and the Housing Market index.
Thursday – Unusually for a Thursday, there is no UK data being released. The ECB will give a monthly report on the health of the EU economy, and Australia releases various measures of unemployment. Most data today is US based however; Inflation Data, Jobless Claims, Building Permits, and Manufacturing data.
Friday – Today’s UK release is Retail Sales; a good indicator of general consumer confidence. In Canada we will see the latest inflation figures. US data comprises Home Sales.
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Labels: Weekly GBP/EUR, Weekly GBP/USD, Weeks Economic Data