Pound vs Euro / Pound vs Dollar / Fundamental Data

16th August 2010

Pound vs Euro

Sterling rose to a 6 week high Vs the euro by the end of trade last week to close at 1.2231 from 1.2022 at the beginning of the week. The Euro was the weaker currency out of the two in spite of strong GDP data from the Eurozone and in particular Germany. Euro’s weakness could be attributed to the resurfacing of concern on sovereign debt risk as well as imbalances inside the Eurozone economies.

During the course of the week Sterling rallies were hampered after the Bank of England cut its growth forecasts on Wednesday and predicted inflation would stay below target over the medium term, leaving the door open for more quantitative easing, that was the trigger for sterling’s biggest daily percentage loss since mid-May, taking it well away from the six week highs reached by Friday.
Next week the domestic economic calendar for Sterling lacks significant market-moving potential.

The release of minutes from the Bank of England’s August monetary policy meeting headline, but investors are unlikely to see anything that has not been priced in already after last week’s publication of the quarterly inflation report. The same goes for July’s Consumer Price Index figures, with the third consecutive decline in the annual inflation rate only serving to reinforce the central bank’s well-publicized view.

For the euro, there are two primary fundamental concerns going forward: whether the economy will expand faster than its peers and the threat of another financial crisis. Between the two dominant themes, financial uncertainty holds the greatest potential for the future.

Officials didn’t fix the problems after Greece raced towards default they merely offered a temporary patch that was dependent on investor optimism. It is this precarious position that is exposed through last week’s developments that show a lack of progress with curbing deficits and surviving austerity measures.

Pound vs US Dollar

Last week saw further volatility for the GBP-USD currency pairing as investors flocked to the Greenback amidst concerns for both the UK and Eurozone economies and there projected recovery. The Pound opened the week at 1.5965 before moving to a six month high of 1.5997 falling just short of the high resistance of the 1.60 barrier. This would prove to be short lived as by Thursday the level had fallen to 1.5561, almost 2.75% lower than Mondays peak.

The main reason causing the downturn seemed to be the announcement of the UK quarterly inflation report released on Wednesday Morning. In the report Bank of England Governor Mervyn King downgraded the growth forecasts and stated that although the bank expects the inflation rate to be above the 2% target until the end of 2011, we could see the level drop significantly in 2012.

Investors immediately acted on this placing their investments into the safe haven of the USD as it appears unlikely that the UK will increase interest rates significantly with such a high degree of uncertainty.

Investors belief in the Dollar was clearly on show this week as the fed released its FOMC statement. The outlook in the US was also uncertain and showed it was likely to continue its slow recovery as rates were yet again held at 0.25% the level which has now been in place since December 2008.

This shows that even with negative information coming out of the US its status alone keeps it strong and for those with a Dollar requirement close contact with us here at FCG could prove to be valuable as fundamental information could help to action a trade at the best possible time.

This Weeks Data

Below as usual we list the main events to look out for each day this week. In our view the key day is Wednesday when we see the Bank of England minutes.

Rarely are the effects of data releases simple to predict and forecast. For example last week, we saw very a very gloomy outlook from the Bank of England, coupled with very good data from Germany and the EU. Logic suggests this would mean Sterling weakness and Euro strength meaning GBPEUR rates would fall. The opposite was true, and at the end of last week rates broke through €1.22.

The reason was risk aversion and continued wariness about investing in the EU. For this reason, take the opportunity for a free consultation with one of our FX traders who are fully versed on the effects of the data coupled with the economic situation of each economy. Our experienced FX traders can explain data releases, the possible impact on the currency you need to buy or sell, and inform you of the options available to ensure you make an informed decision on when to fix your rate.

Markets will be reacting to yesterday evenings UK house price data where figures from Rightmove showed a 1.7% drop. The remainder of Monday is EU based, with various inflation measures are released. Inflation has an impact on future interest rate movements, and so will be closely watched by the markets.

Inflation data from the UK starts the day, along with Retail Sales. The former will give clues as to UK interest rates, and the latter is a barometer of consumer confidence and market conditions. In the US, producer prices will be closely watched. Changes in the PPI are widely followed as an indicator of commodity inflation.

The key data today is the Bank of England minutes. These will reveal how the MPC voted for their recent decision to hold rates. If 2 or more voted for a hike, expect Sterling strength. If 1 or less voted for a hike, we expect the pound to come under pressure.

Retail Sales data from the UK this morning will show how confident consumers are as Retail Sales are widely followed as an indicator of consumer spending. German producer prices are also released today, following their surprise record growth last week. Jobless data from the USA rounds off the day.

Very quiet day for data releases, other than consumer prices from Canada.

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