Sterling Euro Outlook 21st August 2009

Pound Rates 21/08/09:

  • GBP/EUR 1.1540
  • GBP/USD 1.6490
  • GPP/AUD 1.9836
  • GBP/NZD 2.4335
  • GBP/CAD 1.7887
  • GBP/JPY 1.5489
  • GBP/ZAR 12.952

Pound falls on weak UK finances
Sterling fell broadly on Thursday, dented by figures showing an unexpectedly sharp deterioration in the UK public finances. The borrowing figures showed a record deficit for the month of July, which is the first time government accounts have been in the red in that month since 1996. Rates for Euro have dropped back into the 1.15’s this morning.

The pound had initially risen on news that British retail sales rose 0.4 % in July – double the expected, but quickly erased those gains and turned lower as attention switched to concerns over the UK’s parlous fiscal situation. I briefly touched on this in yesterdays report, as it’s our finances and debt levels that are likely to keep the pound weak.

“In a nutshell the public finances figures were awful, and the UK economy is looking very shaky,” said Maurice Pomery, managing director at Strategist Alpha.

“People started by buying sterling on the retail sales and M4 headlines, but then started looking at the detail and the public finances data and things turned around,” Pomery said.

He believes the outlook for sterling remains poor and said pound euro rates may drop to €1.14 and GBPUSD rates will drop below $1.60. Whether this will happen remains to be seen, however if you have a requirement in the short to medium term, you may wish to discuss a Forward Contract.

The other thing keeping the pound low is the Quantitative Easing (QE) measures. The jury is still out on whether the Bank of England will need to further expand its QE programme — buying assets with new funds to pump money into the economy (see yesterdays report for a detailed out look on this).

A Reuters poll showed a majority of economists believe the UK central bank will cap its government bond purchase programme at 175 billion pounds. About a third of those polled, however, felt the target would be raised again in November. So, it’s very up in the air, and so Sterling is likely positioned accordingly.

Given the poor UK economy, it’s more likely to drop than suddently rise in the short to medium term. Forecasts for Euro suggest rates will drop and the pound is going to remain weak for some time to come.

Oil Prices
The price of oil rose by more than $3 to settle above $70 a barrel after a surprise drop in crude imports and inventories in the US yesterday.

US crude stockpiles plunged by 8.4 million barrels as imports hit the lowest level since September 2008, the Energy Information Administration said. Analysts had expected supplies to grow in the week to 14 August. They added that the drop in imports may have been caused by firms holding more oil in tankers offshore and waiting for higher prices before importing the extra crude, as is often the case.

Oil prices have a big impact on the value of USD as they import so much oil. This is what weakened the US Dollar yesterday. Likewise Canada exports oil, and so the opposite is true. All of this affects the value of Sterling and Euro also, as a strong or weak dollar determines risk sentiment, and thus also affects investment into riskier assets such as GBP, AUD and NZD.

Todays Data
NZ – Credit Card Spending
Ger – Purchasing Managers Index
EU – Purchasing Managers Index
US – Home Sales

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