Sterling hit a 1 month low against the US Dollar yesterday as traders continued to dump the pound on the back of last week’s dismal U.S. payrolls figures, which cast doubt about an improvement in the global economy. We’ll see below that there are forecasts that the worst is over, however the markets are remaining cautious and awaiting actual data rather than forecasts.
Worst of Recession Over?
The worst of the UK’s recession is over, according to the British Chambers of Commerce (BCC) business group, but talk of a recovery is premature.
Its report, based on a survey of 5,600 companies, found there had been “welcome progress” in confidence levels between April and June. It’s not all good news however, as predictions continue that unemployment will reach 3.2 million by the middle of 2010. It warned that the increase in confidence was fragile.
Last week, the Office for National Statistics sharply revised its GDP data for the UK, saying the economy shrank by 2.4% in the first quarter of 2009, compared with its earlier estimate of a contraction of 1.9%. With these heavy revisions, the BCC said it was far too early to say that recovery is secure.
Or is it?
It’s this belief that the worst is over that caused the pound to rise throughout June. However, actual figures indicated otherwise, which is why the pound fell back. So, take this news with a pinch of salt, and the currency markets will move more on the actual data, rather than surveys!
To illustrate the conficting opinions, the Organisation for Economic Cooperation and Development (OECD) has warned that the UK’s recovery will be very slow indeed with unemployment rising to 10%. In its annual health check of the UK economy, the OECD says more must be done to shore up the banking system and pull back huge levels of government debt.
So, when to fix your rate?
With all these conflicting opinions, it’s very hard to predict which way things will go. In the medium to long term, I expect the pound to recover and rates against the Euro to climb back above 1.20 although this may not happen until toward the end of the year. You have the following options:
Do Nothing – This high risk strategy means relying solely upon a spot contract and one won’t know the rate of exchange achievable until the actual point of buying the currency. The volatility and unpredictability of the currency markets makes this strategy high risk and speculative. The markets do move both ways, so it could result in a win (or lose) situation, however it does make budgeting for the future virtually impossible.
Secure a Forward Contract – This will enable you to lock into a rate of exchange the moment you know you have a currency requirement in the future. It will protect you against any market movement, both positive and negative and you will know exactly how much the transaction will cost you. Securing a forward contract with the broker, at higher level of exchange than that agreed with the supplier/purchaser will ensure a profit margin on the exchange rate alone. The benefits extend to being able to calculate budgetary forecasts for at least the term of the Forward contract.
Use Currency Options –The two key tools are a Stop Loss order, which will protect you against adverse exchange rate movements and secure your currency if it falls below a pre-agreed level. The other is a Limit order, which is placed at the top end of the market to secure currency at a specific price that may not be currently available. This type of contract is particularly useful when the markets are moving in a positive direction for you.
The best option for managing currency risk will be different for everybody, as they will have their own specific requirements, limitations and flexibility with which they can reach to.
Get in touch today to discuss your requirements and which option may be best for you. Dont leave it to chance, and just “hope” that the rate moves your way!
Industrial Production and Manufacturing Production. This measures output in these sectors, and we’re expecting the figures to -11.3% and – 11.8% respectively. If the actual figures at 09:30am are worse than this, expect the pound to fall. Any better figures could cause Sterling Strength.
Later we have Nationwide Consumer Confidence. This captures the level of confidence that individuals have in current and future UK’s economy. Here the expected figure is 55. As always, any significant difference will cause exchange rate volatility.
Lastly we have GDP estimate report at midnight that comes out a month before the official announcement. The report is highly reliable and would influence the UK monetary policy.
For the EU, we have German Factory orders. An increase in the factory order total may indicate an expansion in the German economy and could be an inflationary factor. As regular readers will know, as Germany is the largest economy in the EU, economic data is closely watched as an indicator of total EU performance.
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