Monday 28th November 2011
Good morning. It’s the start of a new week, so today we’ll take a detailed look at how the currency markets fared last week, in particular Sterling against the Euro and US Dollar.
In this week’s Report:
• Sterling/US Dollar rates hit 7 week low
• EU debt crisis keeps Euro weak
• ECOFIN meeting could affect GBP/EUR levels
• 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;
It was a slightly less volatile week than we have been used to of late, but we still saw more than 1.5 cents between the high and the low as risky currencies suffered in the early part of the week as Spanish government bonds climbed to a much higher price than was anticipated, and German bonds saw weak demand, raising concerns that German sovereign debt may be losing its safe-haven appeal. Sterling/Euro started to move up from the low seen on Wednesday of 1.1544 and the decline in the single currency was compounded by weak Eurozone industrial data that showed its largest monthly fall in almost three years.
Wednesday also saw the release of the Bank of England minutes from November’s meeting. The committee voted unanimously to hold the bank rate at 0.5% and maintain the current level of Quantitative Easing at £275bn which was largely in line with expectations. The minutes did however shed some light on why we hadn’t seen an increase in the asset purchase program and suggested that further policy moves may be unlikely before February.
Even though inflation is expected to fall below target over the medium term (which gives the BoE more room to expand QE as it normally adds to inflation) it looks like the MPC will take their time in monitoring the impact of the new round of asset purchases and will help them to look at the evidence of how inflation is falling. This by no way means we will not see any surprises from the central bank as the last increase of £75bn in October was quite unexpected and forced the Pound down 3 cents against the Euro in 24 hours; this made a €200,000 purchase £4,500 more expensive in 1 day!
With UK growth seeming to hold steady at 0.5%, and most other UK data remaining positive on the whole, we expect the GBP/EUR cross to be mainly moved by developments in the Eurozone. We have seen poor industry figures and retail sales from most of the main EU economies of late and there is still the real possibility that we could see another interest rate cut when the ECB meet on 8th December which could all weigh on the Euros progress.
It is also possible that Greece will need another round of financial aid before the 9th December which we would expect to restrict the Euro in the meantime, but based on previous bailouts, any help could strengthen the single currency after it is announced. With this in mind we could easily see weeks like earlier in the month where the rate can move 3 cents between the high and low in just a day.
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Sterling vs. US Dollar;
Sterling hit a seven-week low against the Dollar on Friday, dragged lower by a weakness in the Euro versus the U.S. currency on worries that European officials were making little headway in solving the Eurozone debt crisis. The Pound fell to $1.545, its weakest since early October, as investors sold currencies perceived to be risky for the safety of the Dollar, boosting it broadly.
The UK currency also struggled in the aftermath of bleak economic outlooks given by Bank of England officials on Thursday, and was poised to post its worst weekly performance versus the Dollar in a year.
The latest knock to Sterling came after BoE policymaker Ben Broadbent on Thursday said Britain risked sliding back into recession, while his colleague David Miles said more quantitative easing was possible.
Markets were relatively quiet towards the end of last week, with trade lightening significantly into the US holiday. After polishing off Thanksgiving turkeys, millions of Americans headed to the shops on Friday for the busiest shopping day of the year. In fact, half of the entire US population was expected to hit the shops at the weekend.
Black Friday (so-called as it is when many retailers head out of the red and into the black) saw many stores open at midnight, or even earlier this year. Consumer spending accounts for about 70% of US economic activity and therefore a fair movement could be expected with the GBP/USD cross. A bad holiday season would raise recession fears again, whereas a strong one would start to dispel those fears. Analysts said that a powerful start to the shopping season could stimulate more hiring of staff by the retail industry, which supports about one-quarter of all jobs in the US.
Barack Obama also noted that: “It’s one of the worst days of the year to be a turkey”.
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Weekly Economic Data that may affect exchange rates
Monday – We start the week in the Eurozone, with Inflation and Confidence measures from Germany. In the UK, the only data of note is a trade survey from the CBI. Stateside we see new home sales and building permits.
Tuesday – UK House Price data is released today, in addition to mortgage approvals and lending data. Germany has some Retail Sales figures, and the EU releases Industrial Confidence, Consumer Confidence and Economic confidence. From the USA we have consumer confidence and Housing Prices.
Wednesday – UK data today is quite light, with only Consumer Confidence measures. Today we have the ECOFIN meeting, in which the finance ministers of the 27 member states will discuss various coordinated economic measures. Staying in the Eurozone, we also have a raft of unemployment data from the EU and Germany. There are also EU inflation figures released today. In the USA we have Home Sales, & Non-Farm Productivity. Canada releases GDP data today which could affect GBP/CAD rates.
Thursday – In the UK today we see further House Price data from the Halifax, in addition to some inflation figures. Australia has some releases today including Building Permits and Retail Sales. In the Eurozone there are various inflationary measures. From the USA we have Jobless Claims and Unemployment data.
Friday – We end the week with UK house Price Balance data from the RICS. The EU has some inflation figures, and the USA releases its monthly NonFarm Payroll data which often creates significant volatility for GBP/USD rates due to the numbers being so difficult to forecast.
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