Weekly GBP/EUR & GBP/USD Forecast July 2011

Weekly Currency Report 11th July 2011

In this week’s Report:

• Sterling vs. US Dollar remains largely range-bound
• Sterling Euro bounces up due to US Dollar sell-off
• Forecast for GBP/EUR & GBP/USD
• Round up of the week’s data that may affect rates

(For currencies other then GBP, EUR and USD, contact us for a consultation)

Sterling vs. Euro;

We finally saw some respite for the Pound on Friday afternoon as rates moved back above 1.1250 for the first time this month.

The week started with some better than expected UK house price, service sector and manufacturing data but the positive readings did little to help Sterling as the ECB interest rate decision was looming on the horizon. It had widely been expected (and most likely already priced in to the market) that the ECB would raise interest rates by a quarter point to 1.5%, especially after Jean-Claude Trichet, the head of the European Central Bank, had used his codeword of “strong vigilance” with regards to inflation after last month’s announcement.

This time however, he stated that “there were still upside risks to inflation” which was similar to what he said after the last hike in April and suggests that the central bank were expecting to have to raise rates again later this year, and perhaps as early as August. However, there are still concerns within the markets about debt problems spreading to the peripheral economies, and also fears about how these economies would deal with further interest rate increases.

On the other hand the state of the UK economy isn’t exactly doing much to help the Pound. The NIESR estimate for GDP growth slowed sharply in the three months to June, dropping from 0.5% to 0.1% which only reinforced the view that the UK economy will remain weak for some time. If UK inflation data released Tuesday either slows or remains the same then it could add fuel to the Bank of England’s argument that inflation it will cool on its own and there is therefore no need to raise interest rates until growth is back on track.

This kind of reading could have longer term implications for Sterling, as we saw last week when banks started to suggest that it could be May 2012 before UK rates go up. This then led to Barclays Capital reducing their 3 month forecast for GBP-EUR to 1.05 on Wednesday of this week, while some investment institutions maintain that rates will settle back up around 1.15 later this year.

While a fall well below 1.10 is possible, the continuing problems the Eurozone is facing will continue to limit confidence in the Euro so the slightest change in one of the countries concerned could have quite an effect on the exchange rate. For a more detailed look into this week’s data releases from the UK and EU have a look below at our market data section.

Sterling vs. US Dollar;

US economic activity in the first six months of the year was hampered by rising commodity prices and supply chain disruptions following Japan’s devastating earthquake in March. Although more positives can be taken from the early part of the second half of the year, the US economy remains unquestionable volatile. Most notably, efforts to improve unemployment have been encouraging, as US companies increased hiring measures throughout the month of June however; job growth is not expected to be strong enough to make any large dents into the mounting levels of unemployment. The private sector will account for all the jobs created, as has been the trend over the last seven months, with layoffs at state and local governments continuing.

The debt ceiling crisis remains the biggest grey cloud over the United States. President Obama insisted that he would not sign a short-term extension on the U.S. debt ceiling but instead would work through the weekend on a more permanent deal to avoid a debt default. Trying to break a budget deadlock to enable a debt ceiling increase remains a stiff challenge for Obama and his Democrat colleagues ahead of the August 2 deadline – the US treasury has warned it will run out of money to pay all of the country’s bills if the debt ceiling is not increased by the cut off date. Although it is likely that a deal will be firmed up before the deadline, the constant negative press is likely to see the greenback struggle to continue to rally as a consequence.

Cable has weakened from $1.68 to $1.59 over the last quarter, and is widely expected to remain trading around these levels for at least the medium term, according to the median average of 60 banks and analysts polled by Reuters, who predict Sterling will be trading at around $1.61 during the next 6 months.

Weekly Economic Data that may affect exchange rates

Below are the main releases for the week ahead. For a free consultation on how these releases could affect the cost of your currency requirement, open an account with us today. This is free to do, doesn’t obligate you in any way, and simply gives you access to our market knowledge and commercial exchange rates.

MondayToday’s UK data comprises RICS House Price balance, and BRC Retail Sales. Both of these give an overall barometer of the UK economy and so can affect Sterling exchange rate. Other than that it’s a quiet day with no data of note from the US or EU.

TuesdayThere are lots of UK releases today: Consumer Confidence, Retail Price Index, Goods Trade Balance, Overall Trade Balance, Consumer Prices and House Prices. So, clearly much here that will affect the Pound, depending if the numbers are above or below forecast. From the Eurozone we have German inflation figures and a meeting of EU finance ministers, in which the EU debt crisis will no doubt be discussed. Stateside we have FOMC minutes and Trade balance numbers.

WednesdayToday we have EU Bank stress tests, which will determine how able they are to weather a financial storm. There are also EU Industrial production figures released today. From the UK we have various measures of unemployment. It’s also quite a busy day for US data, with Mortgage Approvals, Import prices and a budget statement all likely to affect cable.

ThursdayNo UK data of note. EU inflation figures combined with a report from the ECB though could still affect GBP/EUR rates. There is also a speech from the ECB president, so we will be watching this closely for any coded comments that signal future fiscal policy. From the USA we have retail sales, inflation data and jobless claims.

FridayOnto Friday, and most data is US based – inflation data and industrial production are the main releases of note. There are also trade balance figures from the EU.

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