Good Morning. In a light day for UK data yesterday, the pound rose slightly on news that Dubai has been bailed out by Abu Dhabi to the tune of £10bn. Read a report on the BBC site here. This boosted risk appetite for riskier currencies such as the pound.
However, concern surrounding Britain’s public debt and potential threat to its triple-A sovereign credit rating meant the pound lost some of the small gains. At 08:30am rates are as follows:
- GBP/EUR 1.1160
- GBP/USD 1.6256
- GBP/AUD 1.7900
- GBP/NZD 2.2505
- GBP/CAD 1.7256
- GBP/CHF 1.6879
- GBP/ZAR 12.090
- GBP/JPY 144.67
- GBP/NOK 9.4761
- EUR/USD 1.4559
The main reasons rates are higher are two fold. First, the news that Dubai has been bailed out is a good signal for Sterling. Perhaps a seemingly distant influence it is important to remember that Sterling is perceived as a riskier currency far more likely to attract investors when the global stage is stable. Additionally with much of Dubai’s money borrowed from British banks any news of a bale out is likely to have positive effects on Sterling and could lead to rises.
Also, with Greece and Spain having their credit rating reduced, and the riots in Greece at the moment are causing weakness in the Euro. This has caused rates to rise.
With both the highs of 1.20 and the lows close to parity seeming a distant memory, it seems as though the high volatility of the GBP/EUR exchange rate has fluctuated over the past few weeks. This was only echoed by the Bank of England’s decision to hold interest rates and any further Quantitative Easing, much as expected and therefore having little effect on Sterling.
The most significant news from the UK came from Parliament this week after the Chancellor of the Exchequer Alistair Darling announced the annual Pre-Budget Report. However, rather then what Mr. Darling said, it was his reluctance to explain a solution to Britain’s mounting debt crisis that led to concern. As a result this fuelled speculation that the UK credit rating may be reduced; a threat that could severely damage the rates for those looking to buy Euros.
In Europe German factory orders were weaker than expected falling by 2.1% in October, this was coupled with a weaker German industrial production dropping by 1.8% and giving the Euro no real stepping stone to advance. Further worries came as Greece and Spain’s sovereign credit rating were downgraded indicated a higher level of risk to investors. All of which devalued the Euro and perhaps more crucially revealed a slowdown in Euro Zone recovery, a scenario that could greatly disadvantage anyone selling Euros.
For the Euro to make ground this coming week, markets will need to see further confirmation that the Euro zone is making continued steps towards sustained growth. Confirmation of this could come from releases of unemployment figures (Monday), German ZEW Index (Tuesday), construction output data (Thursday) or German business sentiment figures on Friday.
Sterling fell to a one-month low versus the U.S Dollar, after Moody’s Investors Services described the UK as weaker than top rated countries like Germany and the US. The Pound fell to a low of $1.6199, as global stocks deteriorated, boosting demand for safe haven assets.
Given the uncertainty over the UK’s fiscal position due to our huge levels of debt, it’s likely that GBP/USD rates will remain volatile over the coming months. Couple this with the fact the USD is a safe haven currency, as they exit recession and risk appetite increases, we could also see USD weakness as a result.
Due to this extreme uncertainty, clients may wish to protect themselves against adverse rate movements. Using a Forward contract to do 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 giving you peace of mind. With the markets so volatile, simply hoping rates may move in your favour is a risky proposition.
Looking ahead to the upcoming week’s economic event risks from the US includes industrial production data on Tuesday, consumer price inflation data and housing construction starts early Wednesday.
If the results are better than expected it could give some strength to the Dollar however, late Wednesday will see attention drawn to the Federal Open Market Committee (FOMC) Interest rate decision which should be monitored closely for any monetary policy statement change as this key event has the ability to revive the US Dollar.
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