Monday 10th October 2011
Good morning. It’s a Monday morning, so let’s take stock of where rates have moved over the course of the last week, which was an extremely volatile one for the currency markets!
In this week’s Report:
• Bank of England announce £75bn Quantitative Easing
• GBP/USD falls to 14 month low
• GBP/EUR hits 7 month high before dropping sharply
• 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
Last week saw GPB/EUR hit the highest level in 7 months, briefly breaking the €1.17 level. The gains were short lived though, and by the end of the week rates were around the €1.1550 level, however still very close to the 7 month high considering it had been in the €1.13’s just several weeks ago. The volatility within the Eurozone has continued with decisions made on Quantitative Easing (QE) and Moody’s downgrade of banks within Greece, Portugal and the UK.
The start of the week saw trading around the €1.16 level with everyone still waiting for news of whether the UK will be implementing more QE on Thursday. The GBP/EUR hit €1.17 as it was announced that Greece will miss its deficit reduction target. Wednesday also saw Moody’s downgrade of even more of Greece’s and Italy’s banks further increasing the chance of default. Poor construction data in the UK kept the GBP/EUR steady as everyone waited for the Bank of England’s decision on QE.
The revised GDP figures showed the economy is pretty much at a standstill, and has been now for 6 months. As the BoE announced £75 billion worth of QE at 12.00pm traders saw the Euro drop over 1% within a matter of minutes. The BoE hopes that through added QE the economy will get the much needed bump started as more people and investors are able to borrow and spend more to help stimulate economic growth and increase the strength of the GBP.
Speaking at his last news conference before stepping down, ECB President Jean-Claude Trichet’s urged “banks to do all that is necessary to reinforce balance sheets” where needed. The European Central Bank is offering unlimited new one-year emergency loans to banks to help steady the Eurozone. The ECB would also help the banks by spending 40bn Euros (£35bn) buying assets from them known as covered bonds.
The end of the week saw Moody’s downgrade the credit rating of twelve UK financial firms including Lloyds, RBS, Nationwide, and Santander. Nine banks in Portugal were also downgraded further showing how closely linked we are to the single currency. The news sent bank shares lower, with RBS 3.8% off and Lloyds losing 3.36%.
Even though we are now down from the highs seen earlier in the week, the GBP/EUR rate is still doing well compared to the end of August where we were around the 1.13 level. Even though there does seem to be added volatility and uncertainty, the fact is that exchange rates are currently still much better than they have been in the past and we are still hovering around a 6 month high.
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Sterling vs. US Dollar;
There were a number of hotly anticipated market events toward the later stages of last week for this cross. Thursdays Bank of England meeting was always going to draw the attention of traders’ eyes with speculation rife that a further tranche of Asset Purchasing or Quantitative Easing as it’s commonly known would be announced by Mervyn King and his cronies on the Monetary Policy Committee. The big news from the US was always likely to come from Friday’s Non Farm Payroll with a lot of talk about jobs creation being a big factor in whether or not the US would enter a double dip recession or not.
True to expectations the Bank of England did announce a new programme of QE however releasing up to £75bn to the markets. The extent of the programme surprised the markets, as in the past they have done it in £25bn increments. The scale of the stimulus certainly was not expected and as soon as it was announced, Sterling fell sharply by over 1% against the major currencies and quickly slipped fell to a 14 month low against the Dollar.
Fridays downgrading of 12 UK financial companies by the rating agency Moody’s, including Lloyds, RBS, Nationwide, and Santander further added to Sterling’s woes. Moody’s said it now believed the UK government was less likely to support some firms if they got into trouble leading the market not only to sell shares in many of the 12 companies but also the pound.
As a back drop to this, America is still widely benefiting from its renowned safe haven status in light of the European Sovereign debt crisis and should have been further boosted by a stronger than expected number in Fridays Non Farm Payroll. However in the kind of twist almost entirely unique to currencies, the Dollar actually weakened against the pound after the number was released, potentially due to a renewed sense of risk appetite from traders when may have taken the number as a signal that the US will avoid double dip.
All in all last week was extremely volatile on this cross with excellent opportunities for both buyers and sellers. Next week looks set to be similar with a raft of data releases from both sides of the pond including the Federal Reserve meeting minutes and retails sale prices for both nations. You can see more detail on the data releases later in the report.
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Weekly Economic Data that may affect exchange rates
Monday – US Markets are closed today for Columbus day, so there is no data from the states. We will see some Housing data from the US. In the EU there are trade balance figures from Germany, and some confidence measures for the EU as a whole.
Tuesday – Industrial and Manufacturing production figures are releases from the UK today. These will be watched quite closely as it’s one of the few sectors showing growth, so poor results could reflect a slowdown in the economic recovery. There is also a GDP estimate for the UK showing total growth. With markets open after the break in the USA, the minutes to the recent FED decision to hold rates will be released.
Wednesday – Unemployment figures from the UK are the main numbers to watch for today. An increase in those claiming unemployment benefits would weaken Sterling. There are some industrial production figures from the EU later in the morning.
Thursday – Today is quite a busy data for fundamental data releases. Starting in the EU, we have German inflation figures and a report from the European Central Bank. In the UK we have Trade balance figures which often have an impact on exchange rates. In the USA there are Jobless figures and a monthly budget statement.
Friday – Lots of EU data today. Trade Balance figures from the EU are released at 10am, followed by various measures of inflation. In the US, retail sales will show how confident consumers are in the economy.
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