Pound gains on good data / USD Forecast

Pound Strengthens
Good Morning. Sterling extended gains today, hitting a 1 month high against the dollar and a 10 day high against the Euro, after data showed industrial production rose more than forecast.

Also causing the pound to rise were comments from a Bank of England official that the central bank was close to holding back on economic stimulus. This is positive news for the UK, and GBP has strengthened accordingly.

Euro Weakens
EUR weakened also today, helping boost GBP/EUR rates. The reason for the weakening was the figures showing the German economy shrank by 5% in 2009, hit by a slump in exports and investment, official data has shown.

It was the first time in six years that the economy had shrunk, and it was the largest contraction since World War II, the Federal Statistics Office said.

Germany, Europe’s largest economy, emerged from recession in the second quarter of 2009.
The government predicts growth of 1.2% in 2010, but reports suggest it is set to raise its forecast to 1.5%. Because it’s the largest economy in the EU, this has a big impact on the single currency.

Today’s strength in the pound could well be short lived, as despite the good figures the UK is still the only economy still in recession. We have already had record trade on the dealing floor this morning with many clients keen to take advantage of the spike, and fix rates with one of our Forward Contracts. If you would like to discuss this please get in touch.

Pound / US Dollar Forecast
The UK economy delivered some positive data last week. The manufacturing PMI (purchasing managers’ index) and the Services PMI were both showing signs of growth, which is a positive indicator for Sterling strength.

The US economic indicators on the other hand were in comparison quite volatile. The American manufacturing and the services PMI were positive as well as Factory orders. However, a crucial indicator of how the US economy is doing is the Non farm payrolls which showed 85,000 job losses in December which was worse that expected and resulted in a boost for Sterling and kept the Dollar under pressure.

In the week to follow there could be similar volatility to look out for, the UK’s main risk coming from the NIESR (National Institute of Economic and Social Research) GDP Estimate due Wednesday, This unofficial release of the GDP has proved correct in the past.

It showed that the British economy grew by 0.2% in the three months ending in November. This gives some hope for seeing growth in the final Quarter which could then result in the UK being unofficially out of recession and returning some strength to sterling benefiting those buying the Dollar.

In America the December Retail sales data (Thursday) would be the one to watch along with Friday’s Consumer price index and the Michigan confidence survey, if all return as expected Dollar could recoup the losses made at the beginning of this week if not rise further.

With the UK general election campaign firmly underway bringing into focus the ballooning government debt levels and raising concerns any positive economic data out of the UK may well be negated, across the pond however the recent volatility could continue into next week, there are a number of options available for instance Forward contracts which eliminate most of the risk associated with uncertain markets enabling you to secure a rate for up to 2 years into the future, limit and stop loss orders can maximise your buying power in the markets. Please contact your FCG account manager to discuss which options would best serve your interests.

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