Weekly GBP/EUR & GBP/USD report, and weekly data

Tuesday 30th August 2011

Good morning. As is customary for Monday mornings, today we’ll take a detailed look at the movements in Sterling/Euro Sterling/US Dollar and a round up of the weeks data that may affect exchange rates

In this week’s Report:

• Sterling starts to fall on poor UK data

• UK Interest Rates going to remain on hold for some time

• GBP/USD falls from 2 year high

• 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;

After the previous week saw more than a 2% gain in the Sterling/Euro exchange rate, we hoped that last week would at least provide some degree of calm for the volatile pairing, but unfortunately this wasn’t to be.

Tuesday saw better than expected CBI industrial order data from the UK which was closely followed by a large fall in Eurozone economic sentiment from the ZEW. This is a key indicator for the health of the EU economy over the coming months and such a large fall does not look good.

These concerns were compounded when on Wednesday both German IFO business climate figures and Eurozone industrial new orders were worse than expected and the industrial order figures actually showed a negative reading.

Later in the week UK consumer confidence rose and GDP figures remained at 0.2% after fears they could be downwardly revised, so surely with all the poor EUR data and some reasonable figures for the UK the rate went up? Unfortunately not…

MPC member Martin Weale gave a speech in Dublin on Thursday in which he explained the reasons for him to abandon his call for a 25 basis point hike in the UK interest rate at the latest policy meeting. The main reason is the sharp deterioration in economic data since the start of the year and there are now suggestions that we could see a coalition in favour of renewed asset purchases (Quantitative Easing) between members of the Bank of England should the UK economic outlook deteriorate significantly.

It has forced the Pound to retreat by 1.5% against the Euro since Wednesday of last week and just goes to show that even if the data suggests one thing, the rate can do quite the opposite. We had already expected the interest rate in the UK to remain at the current all time low until at least May 2012 but now the MPC has a unanimous 9-0 vote in favour of keeping the rate at 0.5% it could stay there until late 2012 or even 2013.

There doesn’t seem to be much out on the data front this week so we expect the rate to mainly be driven by continuing debt problems in the EU and any more news about a stagnating UK economy. The mid-market rate should remain range-bound between 1.12 & 1.15 and even though this doesn’t seem like a huge movement, it can make a £4,600 difference on a €200,000 trade.

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Sterling vs. US Dollar;

Sterling maintained its march against the dollar early last week bolstered by profit taking and support from a slight recovery in risk appetite after less gloomy than forecast China manufacturing data and German factory activity numbers marginally eased global growth worries. Further gains were expected to be limited due to concerns about the UK’s faltering economic recovery.

By mid-week Sterling fell 0.5 per cent to $1.6411 on better-than-expected U.S. durable goods orders data which reduced some dollar bearishness temporarily. Analysts said sterling would struggle to find clear direction ahead of a speech by Federal Reserve President Ben Bernanke on Friday.

Some investors were speculating he may use the speech to signal further monetary stimulus to prop up the faltering U.S. economy whilst others had been betting on sterling in recent sessions on the perception the UK is a safer investment destination given U.S. fiscal problems and the euro zone debt crisis that shows few signs of resolution.

Market analysts said sterling may come under renewed pressure, given the UK economy is struggling and rate hike expectations have been pushed back into late 2012. Traders said the pound remains at risk of selling if data continues to show the economic recovery is stuttering, which would increase speculation that the Bank of England may opt for more “quantitative easing” stimulus.

Friday saw US Q2 GDP figures return slightly lower than expected at 1% growth for the quarter. Though growth remains weak, Fed officials do not appear particularly concerned about recession risks, and some have voiced doubts about the wisdom of more QE. The dollar pared losses against Sterling as Federal Reserve Chairman Ben Bernanke said the central bank was prepared to employ tools as needed to promote a stronger U.S. recovery but offered no definitive action and stopped short of signalling QE3.

To put last week’s market movements into perspective, a typical transfer of $200K would have cost £4500 more at the end of the week.

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Weekly Economic Data that may affect exchange rates

MondayNo UK Data yesterday as it was Bank Holiday. There were some GDP figures from Germany and Home Sales data from the USA

TuesdayToday we have UK House Prices and Mortgage Approvals. Eurozone & USA confidence figures are also released today. Staying in the US, we have the FOMC minutes, which show what was discussed at their recent interest rate decision.

WednesdayUnemployment data from Germany and the EU and USA are the main releases to watch out for today. We also see GDP figures from Canada and Factory Orders from the USA.

ThursdayThe busiest day of the week. We start with Retail Sales from Australia and Switzerland, and then GDP figures are released for Germany & Switzerland. Later in the day we have inflation figures from Germany and the UK. From the USA we see Jobless Claims and Manufacturing figures.

FridayWe end the week with Retail Sales from Germany, and Construction figures from the UK. In the US, we have further unemployment measures in addition to the non-farm payrolls numbers. As these are notoriously difficult to forecast, the actual figures often differ significantly, causing GBP/USD volatility.

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