Monday 19th December 2011
Good morning. So, it’s the usual Monday morning take on the previous weeks movements in the currency markets.
In this week’s Report:
• Pound/Euro rates peak at 10 month high
• Euro depreciates due to lack of resolution to debt crisis
• UK unemployment at 17 year high
• Round up of the week’s data that may affect rates
(For currencies other than GBP, EUR and USD, contact us for a consultation)
Sterling vs. Euro;
The markets verdict on last week’s EU summit became clear as the week saw investors move towards safe-haven currencies like the USD. Sterling was well supported with Cameron’s decision to exclude the UK from the new Eurozone treaty as we saw the GBP/EUR rate reach a new high of 1.1949 (Interbank).
Tuesday saw Germanys Chancellor Angela Merkel declare that no further money will be made available for the European Stability Mechanism and that the ECB will not become a lender of last resort. This immediately affected the value of the Euro pushing it up towards the 1.19 level. In the UK, Consumer Price Index (CPI) fell from 5% to 4.8%, but events in the Eurozone overshadowed this.
The Euro weakened further on Wednesday with the GBP/EUR rate reaching a ten month high. UK jobless figures were released and had increased by 128k reaching over 2.64 million, the highest number of unemployed since 1994. With poor data being released from both the UK and Euro zone you might expect that the pairing would stay relatively stable. The reason why this didn’t and hasn’t happened is due to the uncertainty to what is going to happen with the single currency.
Credit ratings of the world’s biggest lenders have come under pressure as weak economic growth and concerns about whether European politicians have done enough to end the Eurozone debt crisis. Some of the world’s most powerful investment banks were downgraded by ratings agency Fitch.
France was warned by credit ratings agencies that it could be downgraded over the Eurozone crisis. Some in France suggest that any downgrade should instead start with the UK, however Downing Street brushed off the remarks stating “we have put in place a credible plan for dealing with our deficit”. This statement is key to why Sterling is performing well at the moment; the markets like the fact a plan is place to reduce our deficit, and this is why Sterling is supported despite poor economic data.
So in summary rates are currently at a 10 month high and rates do look to be stabilising as EU leaders carry on discussing how to combat the debt crisis. Rate forecasts in a recent Sunday Times article for 2012 varied between 1.14 and 1.25 showing the lack of consensus and the fact it could go either way depending on how the single currency reacts.
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Sterling vs. US Dollar;
Sterling’s fortune against the Greenback last week was in vast contrast to its performance against the Euro despite Europe’s crisis being the main driver as explained in the Euro report above.
Sterling fell to its lowest level in three weeks on Monday as investors questioned the progress made at last week’s EU summit, driving demand for the safe-haven U.S. currency as analysts played down the impact on Sterling of UK Prime Minister David Cameron’s veto of any EU budgetary rules, despite concerns that he risks isolating Britain in the 27-nation bloc.
Europe issues aside, the US economic outlook showed signs of improvement and further bolstered the Dollar as unemployment figures month on month returned better than expected, manufacturing output was up from the preceding month, inflation held steady and the FOMC (Federal Open Market Committee) left their monetary policy unchanged and highlighted the turmoil in Europe as a big risk to the U.S. economy.
Coupled with the positive week the US had in terms of economic indicators, cable would continue to take its lead from the Euro crisis, eventually forcing Sterling to a two month low moving towards the close of the week.
As the Euro zone crisis deepens there is every chance we could see the Dollar strengthen further unless of course the European treaty can somehow restore confidence to the markets in which case we may see a renewal of risk appetite as investors begin to test the water once more.
As the levels of uncertainty in the markets and volatility increase and as we near the Christmas holiday season it may be a prudent decision if you have an impending transfer to keep in close contact with your FCG account manager to ensure your maximising your return on your funds.
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Weekly Economic Data that may affect exchange rates
Monday – New Zealand has business confidence data that might affect GBP/NZD rates. Closer to home Rightmove has it’s house Price index, reflecting the health of this sector. In Euro, there is construction data, but of course continued developments in the Eurozone will likely have the biggest effect on rates.
Tuesday – Today the UK will see Nationwide and Gfk Consumer Confidence figures which may affect Sterling. In Australia the minutes to the recent interest rate decision are released. There is lots of data from Germany also today; Confidence measures, Inflation numbers, Business climate and current account assessments, all of which could affect the Euro. Across the pond, the USA released housing and building data, and Canada has a host of inflation data.
Wednesday – The main UK data today is Public Sector borrowing. A deficit would weaken Sterling. There are no key releases from the Eurozone. In the states there are Homes Sales numbers, Canada releases Retail Sales, and in New Zealand GDP figures are released at 21:45pm.
Thursday – A busy day for the UK and US. Starting at home, we have GDP data, Business Investment numbers, and Current Account data. In the USA there are also GDP releases, in addition to Jobless Claims and personal expenditure.
Friday – The Japanese Emperors Birthday, although this is unlikely to affect the currency markets. Of more importance will be UK mortgage approvals. In the states there are quite a few releases; Personal Consumption, Durable Goods Orders and New Home Sales.
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