Monday 9th January 2011
Good morning. Pound/Euro rates have surged to a 16 month high, so today as usual for a Monday morning, I will take a look at movements in the last week for Euro, US Dollar, forecasts for where exchange rates may go in 2012, and the weeks economic data that could affect exchange rates.
In this week’s Report:
• Sterling/Euro hits 16 month high above €1.21
• EU problems continue, weakening Euro
• GBP/USD rates fall as US jobs data surprises
• Round up of the week’s data that may affect rates
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Sterling vs. Euro;
Last week the Pound benefited against the Euro as the single currency slumped to its lowest level in 16 months, driven by fears that the Eurozone countries and their banks may be crumpling under the mounting pressure of their debts.
Shares in two Italian banks, including Unicredit, were suspended after sustaining heavy losses. Spanish banks also suffered last week after the Spanish finance minister said the banking sector would need a €50bn injection to aid recapitalisation. French and German banks were also hit, although to a lesser extent. The seemingly inexorable debt crisis led economists at the International Monetary Fund (IMF) to urge Asian banks to prepare themselves for turbulent times ahead.
The euro dropped to 82.39 pence (1.2137), its lowest level since September 2010. The pound’s strength was down to euro zone weakness rather than a strong domestic economy, even though data on Thursday showed an increase in UK service sector activity.
However, figures released on Friday showed UK house prices fell 0.9 percent in December, in contrast to analysts’ forecasts. This however, had little impact on the currency and the Pound continued gaining strength against the Euro, gains which are expected to continue according to some analysts.
“I think euro/sterling will continue to go lower. All the problems that have caused euro zone bond markets to sell off in the fourth quarter have not only not been resolved, they look set to intensify,” said Neil Mellor, currency strategist at Bank of New York Mellon.
Sterling’s gains last week were helped by Investors preferring the UK over euro zone government debt, boosting sterling, given UK deficit-cutting austerity measures that are already in place and the Bank of England’s independent monetary policy committee.
To put last week’s gains into perspective, a typical purchase of €200,000 would have been £2080 cheaper on Friday than if it had been bought on Tuesday.
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Sterling vs. US Dollar;
The New Year has seen a renewed level of volatility in the currency markets, which as the chart below shows, has been witnessed on the GBP/USD cross. Overall the Pound has had a positive start to 2012 initially rising against the Dollar after having dipped off in the tail end of December:
This early move can in part be explained by a surprising uplift in the manufacturing sector which was reported on the first working day in the UK. Indeed, an up-lift in global economic data from varying sectors had a positive impact for the perceived risky currencies, of which the pound is one and the Dollar is not.
Analysts’ expectations were not as overly positive as traders however, they were swift to remind the markets that although the final 2011 UK manufacturing figures were positive, they were the exception not the rule. The overall Q4 manufacturing figures were actually the worst since Q2 2009 and the overall view is that it may be unavoidable for the UK not to slip back into a technical recession. Again the chart below shows the dip off in the Pound as analysts’ views hit the market.
Indeed the slip in rates was compounded further last week by the hotly expected Non-Farm Payrolls on Friday lunch time. The marquee data release for US employment data showed a creation of 200,000 jobs in the non-farming sectors of the US economy last month, nearly 50,000 more than the predicted rise.
Furthermore these rises lead to a drop in overall unemployment in the US from 8.7 to 8.5%. The graph above went to print slightly before these figures were release otherwise another downward spike would be visible as over a cent was lost on cable after the NFP broke.
Looking ahead to next week we forecast further volatility that could easily see the spikes we saw in the week gone by. The market is still very much all eyes on Europe; what happens with the upcoming Bond sales across the EU will have a great effect on the Dollar which is still heavily benefiting from its safe haven status. Any further boosting of US technical data will only enforce this further.
To the upside for those looking to buy Dollars, the housing market over the pond is still stuttering so watch for further figures there, and any unilateral and positive moves from the big guns in Europe to sure up their issues will see cable rates move in their favour.
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Weekly Economic Data that may affect exchange rates
Monday – We kick off the week with Australian Retail Sales and Home Sales. In the Eurozone there are German Trade Balance and Industrial Production Figures, in addition to EU wide investor confidence Measures. The only data of note from the UK is Halifax House Prices. The USA releases measures of the amount of consumer credit.
Tuesday – In the UK today we see BRC Retail Sales and RICS Housing Prices. There are no EU releases today, but Australia has Building Permits and confidence measures. Stateside, there are measures of economic optimism.
Wednesday – Today we will see UK Trade Balance figures, which often affect Sterling. Germany releases GDP growth figures. In the USA there are Mortgage Applications and the Fed’s Beige Book, which is a report on the current economic conditions in the USA.
Thursday – As usual, today is the biggest day of the week for UK and EU data, so expect choppy movements in the GBP/EUR rate. Starting in the UK, we have Industrial Production, Manufacturing Production and an Interest Rate decision from the Bank of England. In the EU we see German Inflation figures, EU Industrial Production, an Interest rate decision followed by a speech by the ECB president. There could be a rate cut in the EU which may weaken the Euro. Across the pond, we see Jobless figures from the USA, in addition to Retail Sales and a Budget Statement.
Friday – Today the UK releases its latest inflation figures. The Eurozone and USA releases Trade Balance numbers, and there is also a US consumer Sentiment measure.
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