Monday 12th December 2011
Good morning. As usual for Mondays, today I will take a look at events in the past week that have affected exchange rates, GBP/EUR & GBP/USD in particular, along with a breakdown of economic data releases that might affect exchange rates.
In this week’s Report:
• EU Summit fails to agree way forward
• Sterling/Euro rates near 8 month high
• GBP/USD rates fall as USD strengthens
• 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 was an extremely volatile one for Sterling/Euro exchange rates, with wild swings in buying levels as events in the Eurozone affected the Euros value. On Thursday, the ECB decided to cut interest rates down to 1% whilst the Bank of England kept interest rates at a record low 0.5% and announced no change to its £275 billion asset purchase programme. This was widely expected, and there was little effect on the markets, in fact the Euro gained a little strength after the decision. This was not to last however, as ECB President Mario Draghi started an aggressive sell-off across the spectrum of risky assets, stressing that the central bank would not help with financing member countries’ debts and adding that the bank doesn’t see a high risk of deflation. Mr Draghi confirmed that the decision was not made unanimously.
Summit talks took place on Friday with EU leaders agreeing stricter budget rules for the Euro zone but failing to secure changes to the EU treaty among all 27 member states. Countries also failed to reach an agreement on giving a banking license to the Euro zone’s permanent bailout fund, limiting its firepower.
EU central banks will provide €200 billion to the IMF to help fight the debt crisis, with the majority of the money (€150 billion) coming from Eurozone member states. Private-Sector Involvement (PSI) in shouldering future losses on member countries’ bond holdings will follow IMF rules, rather than the haphazard approach taken with Greece, and the operation of the European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM) facilities will be turned over to the ECB. Separately, the European Banking Authority said EU banks will need to raise an additional €114.7 billion in new capital to help them weather the debt crisis.
Overall, this is a hugely disappointing outcome. These seemingly weak measures do not go nearly far enough, and as a result the Euro has weakened significantly, helping GBP/EUR rates remain high.
On the other side of things, Britain said it could not accept proposed amendments to the EU treaty after failing to secure concessions for itself. Analysts said while it may be positive for Sterling if a proposal from the EU for a tax on financial transactions did not impact the UK, there were also concerns that the UK would be left isolated, with much less influence in Europe. First impressions are that EU leaders have not quite shot themselves in the foot by alienating British support (even assuming it was ever offered) but it looks as though they have considerable ground to cover.
Sterling stayed close to an 8 month high versus the Euro on Friday, with a choppy morning session reflecting uncertainty over the outcome of a European summit that did little to impress markets overnight. The Pound looked on track to test its strongest level against the Euro since March as it benefited from investors seeking alternatives to the Euro. Even after all of this, investors still remain concerned about the risks facing the UK economy and its vulnerability in the event of a severe downturn in the Euro zone.
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Sterling vs. US Dollar;
It has been a pretty flat week in the U.S with markets waiting to see what happens at the latest Eurozone summit.
The American economy has been experiencing a period of positivity recently with a raft of good data being released last week. The unemployment rate is at its lowest level in two and a half years, manufacturing appears to be picking up and early reports suggest that the holiday shopping season is off to a strong start. Slowly but surely the U.S seems to be heading in the right direction, which has been represented in the markets with rates holding at a relative low.
But any further gains for the Dollar have been held in check by the threat of major issues in the Eurozone. The U.S economic recovery could be derailed seeing as America’s finances are so closely tied to what happens across the Atlantic and the picture is not rosy. The Eurozone is the single biggest customer for American goods, so if they’re not buying, U.S. businesses suffer. “The situation in the euro area is rapidly deteriorating and contagion is spreading,” said Pier Carlo Padoan, the chief economist of the Organisation for Economic Co-operation and Development (OECD).
Last week leaders holding all-night talks in Brussels added 200 billion euros ($267 billion) to their crisis-fighting war chest and tightened anti-deficit rules, which was hailed by European Central Bank President Mario Draghi as a “very good outcome.”
It is a waiting game to see what happens in the Eurozone but what we do know is that when Europe has problems they become everyone’s problems. A complete European meltdown could kick off a chain reaction that might lead to a global credit crisis. On the other hand we could see some sort of resolution that increases confidence in the Euro.
In a nutshell, it is events in the Eurozone that are driving GBP/USD rates. When there is uncertainty, investors flock to the perceived safety of the Dollar, and this in turn strengthens it, making it more expensive and pushing exchange rates down. If there is a resolution in the EU, it could reverse this flight to safety and we could see the USD weaken again, however it’s impossible to predict what affect global events will have on GBP/USD rates.
The fact of the matter is, things are on the edge whichever way you look at it. It is vital to keep in touch with your account manager at the Foremost Currency Group to make sure you keep abreast of the goings-on in the market. We can ensure that if you are buying or selling currency in the next 12 months you have all the information available and we can help you make an informed decision to making the most of your currency.
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Weekly Economic Data that may affect exchange rates
Monday – There is no UK data today. Australia released Trade Balance figures, and Germany releases price index data. The main even is a monthly budget statement from the USA which could affect GBP/USD rates.
Tuesday – Today we have the first UK data of the week: House Price Data, Retail Price Index, and Consumer Price Index. In the Eurozone we will see German economic sentiment measures. Stateside there are Retail Sales numbers, Economic Sentiment measures and an interest rate decision where we expect the FED to leave rates unchanged at 0.25%.
Wednesday – Unemployment figures are released for the UK today in addition to earnings data. In the Eurozone Industrial production figures are of note. In the USA we will see import prices. Australia releases inflation forecasts also today.
Thursday – A very busy day for the UK and EU. Starting in Europe, we have German Inflation data, and EU wide inflation data. There is also a monthly report from the ECB that could affect the Euros value. We then see further EU inflation numbers and unemployment data. On to the UK, there are Retail Sales to watch for in addition to Construction data. Stateside, Jobless measures and inflation data will be watched closely.
Friday – We end the week with Consumer Confidence numbers for the UK, Trade Balance figures are also released today. The USA and Canada both release measures of inflation.
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