Pound regains strength and exchange rates recover.

As we correctly predicted here on this blog, despite some big drops last week the pound has recovered the losses last week, and have returned to roughly 7 month highs against both the Euro and the US Dollar.

First we’ll look at why they fell in the first place, then as usual for a Monday morning we’ll take stock of this weeks data releases and what this may mean for exchange rates.

The pounds fall last week
Sterling struggled after a surprisingly big fall in UK retail sales figures on Thursday gave traders more incentive to book profits. This followed sterling’s gains in the past few weeks, when solid data had raised hopes for an improvement in the economy. The figures helped to take the steam out of sterling’s climb to the year’s high against the euro and a currency basket early this week. This had been due to firmer-than-expected inflation data and a forecast by an industry group that UK economic growth would return in 2010.

Pound back to 7 month highs
Will little market data, it’s really confidence in the UK and significant lack of confidence in the US and EU that’s really driving the pound higher at the moment. Comments by the Bank of England have also helped to boost the view that the UK is recovering from the downturn.

Bank of England Governor Mervyn King was quoted as saying that there had been recent signs that the pace of decline in the UK economy was levelling off. However, he also said that it was too soon to draw strong conclusions. Minutes from the most recent MPC meeting showed a unanimous vote by policymakers to keep rates on hold at a record low 0.5 percent. They also showed that the Monetary Policy Committee decided to maintain quantitative easing because members judged the better data over the last month had not changed the previous month’s dire outlook on the economy.

So, in these very volatile times even a small data release (as we saw with UK retail sales last week) then rates can drastically correct. We saw GBP/EUR drop 2 cents very quickly. As mentioned above it is really just confidence that’s keeping the pound high rather than any fundamental data that shows this. Any dent of confidence or anything that shows otherwise can quickly change rates.

If you have a requirement to either buy currency with Sterling or indeed convert a foreign currency back to Sterling, then with markets so volatile it’s a good idea to discuss these requirements with us to make sure you don’t get caught out by adverse market movements.

This Weeks data
This week is very quiet indeed for UK data, with the only release of note some house price data on Thursday. Don’t expect Sterling exchange rates to stand still however, as there is plenty of other information that could affect the pound.

The full list of data releases is below as usual. A few to take note of; we have a lot of data from Germany this week. Germany is the largest economy in the EU, and so any figures from here are closely watched as an indicator of EU performance as a whole. Some other EU data as well could well change the value of EUR. If we see very positive data, then the Euro will strengthen and rates will drop. If however figures are worse than expected, then we could see the Euro weaken and rates climb.

From the US, we have some key data including an interest rate decision. These data releases will of course affect GBP/EUR rates, but it can also affect GBP/EUR rates indirectly, so needs to be watched closely. As the USD is a safe haven currency, then in times of turmoil investors flock o the USD, which increases the value and often weakens the pound. If however investors are more confident, which seems to be the case at the moment, then we see movement to Sterling, which currently is seen as higher risk. So, if there is a lot of confidence this week coupled with week US data, then we could see the pound continue to strengthen.

Whichever currency you need to buy or sell, and for whatever reason, ensure you contact us to discuss your requirements and b kept fully informed of any data releases that may affect exchange rates.

Monday
Aus – Vehicle Sales
Ger – IFO Business Climate (is closely watched as an early indicator of current conditions and business expectations in the Euro Zone.)

Tuesday
Ger – Consumer Confidence
Ger – Purchasing Managers Index
EU – Purchasing Managers Index
US – Mortgage Approvals
US – Homes Sales
US – House Prices

Wednesday
EU – Current Accounts (flow of current transactions, including goods, services, and interest payments into and out of the Euro-Zone)
UK – CBI Trade Survey
US – Home Sales
US – Fed interest rate decision.

Thursday
UK – Nationwide House Prices
EU – Industrial New Orders
US – Jobless Claims
US – Core Personal Consumption
US – Gross Domestic Product
NZ – GDP

Friday
Ger – Consumer Price Index
Ger – Import Price Index

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