Sterling to Euro & US Dollar Forecast, August 2009

Good Morning. Today we’ll have a look at GBP/EUR and GBP/USD, and a further analysis of the Quantitative Easing method that has caused rates to tumble in the last week. First let’s have a quick look at where rates are @ 08:30am 11/08/09:

  • GBPEUR 1.1634
  • GBPUSD 1.6494
  • GBPAUD 1.9670
  • GBPNZD 2.4391
  • GBPDKK 8.6607
  • GBPJPY 159.72

Yesterdays Trading
Sterling fell yesterday, extending losses triggered last week by the Bank of England’s surprise decision to expand quantitative easing, which raised expectations for a dovish tone in the central bank’s Inflation Report due on Wednesday. That was in sharp contrast to the dollar, which held most of its gains made on Friday after data showed U.S. job losses slowed last month, boosting speculation for higher U.S. rates.

The pound fell to a one-week low against the dollar below $1.66, while it hovered near a one-week trough against the euro.

Last weeks sterling euro trading perfectly highlighted the notorious volatility of the currency markets. Early in the week Sterling was heavily bought as news broke about profits from two of the UK’s largest high street banks.

In what became widely publicised news, Barclays made a first half (of 2009) profit of nearly £3bn and HSBC much the same. In fact, both banks said these profits were not as good as they could have expected, but the ripple on the open markets that UK banks were profitable again boosted sterling sharply.

Indeed, this news coupled with both the Nationwide and Halifax’s bullish view on UK house prices led to inter bank highs over 1.18 and thus the best trading levels all year.

Of course, this being sterling euro trading, it didn’t last long. In a complete shock to all in the market place, the Bank of England announced in its Thursday afternoon interest rate decision that another £50bn would be released to the, what is in my opinion, questionable Quantitative Easing Scheme.

I say this as even experienced traders and bankers cannot see the value of the scheme as its merits cannot and have not been measured. This latest injection represents over one 3rd again of the initial offerings and certainly deflated sterling as soon as it was announced, with the inter bank level dropping over a point to below 1.17 in the minute after midday.

The market has not really recovered from Thursdays moves, with trading moving lower this afternoon. The hope for those of you looking to buy euros is now that the euro zone figures out this week disappoint and weaken the euro. Don’t expect too much more sterling strength; it doesn’t get better than profitable banks and rising house prices!!

Look out for EZ GDP figures on Thursday and their inflation data on Friday. For a comprehensive list of important market data releases see yesterdays post.

Another choppy session last week for GBP/USD as the market remains indecisive in terms of its mood and attitude toward risk. The balance of risk appears to be the key to interpreting the direction of cable (GBP/USD) over the coming months.

Gone are the days of “Traditional Trade” whereby good figures create a strong currency. The Dollar has been the main Safe haven currency over the past year and has therefore strengthened dramatically as investors run for the relative safety of the dollar and away from equities and riskier currencies such as the pound.

As the recent downturn flattens out and world economies show signs of recovery, those investors who had moved to the Dollar are now pulling out hence the move from 1.35 to 1.70 at the high. Therefore, good news out the U.S. produces Dollar weakness as market confidence returns and people move to equities, commodities, commodity currencies (AUD,NZD,CAD,ZAR) and riskier currencies e.g. GBP.

Looking ahead this week, Thursday will be main focus for U.S figures and key indicators such as retail & GDP which will provide the market will a clearer view as to whether we are on the road to recovery or is if there is still the potential for a W-shaped recession or “double dip”.

The General view amongst analysts is that we have perhaps seen the worst of the current downturn and therefore Dollar weakness has to be the favoured view, with cable expected to Trade at the low 1.64 and the high of 1.70 through this week. Dollar buyers and sellers should contact us to take advantage of these movements.

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