Saturday, 15 September 2012

Pound/Euro declines due to US QE - Full Market Report

Good morning everybody. Last week was a very volatile one that saw a big drop in the GBP/EUR rate, but in contrast the GBP/USD rate rose to a 5 month high. Today I'll take a detailed looks as to why this happened, and what it means going forwards.

In this week’s Report:
  • Pound/Euro rates in dramatic decline
  • US QE announcement main cause of volatility
  • Pound/Dollar soars to 5 month high as dollar weakens
  • Round up of the week’s other data that may affect rates
Sterling vs. Euro;

Last week the Pound continued its downward trend against the Euro, sliding away from the 4 year high of 1.2865 we saw at the end of July back down to the mid 1.23s. The main reason for the drop in the rates was actually due to news from the US after the Fed said it would pump $40 billion into the economy each month until it saw signs of improvement in its struggling jobs market (which will be discussed in further detail in the dollar report) and growing confidence in the euro zone rather than any data from the UK.













The confidence in the single currency mainly came from the news that the German Constitutional Court gave the go ahead for the regions new rescue fund and the European Central Bank laying down bold plans to lower the borrowing costs for struggling countries. This gives investors greater confidence that the euro zone will be able to withstand continued financial storms as they pulled money out of the dollar and back into the riskier single currency.

This week, the most important mover of the GBP/EUR cross is likely to come of the back of continued discussions with the ECB around Spanish, Italian bailouts as well as minutes from the Bank of England MPC meeting released mid-week. The minutes will give a full account of policy discussions including any conflicts of opinions. They will also show which way the individual committee members voted. This will give a good indication of whether the BoE has a dovish or hawkish stance on the outlook of the UK economy. Any indication of a positive outlook or talks of an increase in interest rates would be very beneficial to the pound and would push the sterling/Euro rates up.


What does this mean if I need to buy Euros?


With such a dramatic fall in Sterling/Euro exchange rates in recent times, anyone looking to buy Euros in the near future would be wise to consider locking in today’s rates with the use of a forward contract to protect themselves against any further falls in the market. On the other hand, anyone looking to sell Euros can take advantage of any spikes with stops and limits contracts allowing you to target rates not yet available in the market. To discuss these type of contracts, send me a free enquiry now.

With a property purchase of €200,000 costing you just over £6000 more than it would have done a couple of months ago, it outlines the importance of getting the right information to make an informed choice of what to do.

Sterling vs. US Dollar;

In this section I will have a look at what events have dominated the GBP/USD cross and how they have affected the markets. Last week the single focus of cable was the run up to the Federal Reserve interest rate and Quantitative Easing meeting on Thursday.













Even as early as Monday the market was pricing in some sort of stimulus intervention as Cable reached a 4 month high. The trend of sterling strength against the dollar was maintained on Tuesday as markets continued to price in movement coupled with a threat by ‘Moody’s Investors Service’ that the US was in danger of losing its triple A debt rating, if next year’s budget talks do not result in lower debt to GBP ratio.

When the results finally came in late Thursday UK time the conclusion certainly didn’t disappoint those expecting some action. Ben Benanke backed the purchase of $40 Billion of mortgage backed securities every single month until US growth as well as the US job market improves. In addition Fed Chairman Benanke added to his commitment to get the US economy moving through spending by confirming that interest rates in the US would remain low and wouldn’t be raised until 2015 at the earliest.

This is probably the most decisive action that the market has seen from the US to deal with the financial crisis since its inception. At the very least it sends a clear signal to the rest of the world that the US are prepared to do everything necessary, including trying new strategies to navigate their way out of recession and into competitive growth.

Dollar weakens significantly after announcement

Naturally following this announcement cable continued its upward trajectory as equities and perceived riskier currencies (including Sterling) made gains against the Greenback. With the Fed Chairman indicating that he would be prepared to pump $40 Billion into the economy every month until it has an effect, the market has the potential to continue the current trend of Dollar weakness. Essentially Mr Bernanke has embarked on an endless amount of quantitative easing and so it will be interesting to see how far the markets move off the back of this uncertainty.

Whilst this is undoubtedly a great time for dollar purchasers to be taking advantage of the recent gains, it would be wise to approach the market with some trepidation as the FX markets are notoriously volatile. Despite a clear shift in fundamentals there is no absolute guarantee that the technical levels will follow suit, and indeed there have been countless occasions throughout history where a sharp market movement has been followed by an equally sharp market retraction.

Ensure that you take advantage of a free consultation and explore the possibilities of both Stop Loss orders and Limit orders so that you are able to take advantage of any market gain, whilst at the same time protecting yourself should the market move against you.

Weekly Economic Data that may affect exchange rates

Monday The main data today is Trade Balance data from the Eurozone, showing imports and exports. Elsewhere we have UK House Prices. There are no significant releases from the USA today.

Tuesday Some important UK data today including Inflation data, House Prices and Retail Sales, all of which are a barometer of overall economic health. In the Eurozone we have Economic sentiment surveys from Germany and the EU. In the USA we have a speech from the Federal Reserve, and some Housing data.

Wednesday
The Bank of England release their minutes today, which often causes volatility for Sterling. In the Eurozone we see the latest construction data output. In the USA there are Homes Sales data and another speech from the FED. Over in New Zealand we see the latest GDP figures at 11:45pm.

Thursday
UK Retail Sales are released today, showing full monthly and annual comparisons. On the Eurozone we have inflation data from Germany, Manufacturing data from Italy, German and France. We also see measures of EU Consumer confidence. Over in the USA we see the latest Jobless Claims, Manufacturing data, and yet another speech from the FED.

Friday We end the week on a quiet note, with the only UK data of note Public Sector borrowing. There is nothing of note from the EU today. Over in the United States we have, you guessed it, another speech from the FED.
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