Monday 6th February 2012
Good morning. Today we’ll take a detailed look at recent exchange rate movements. With the GBP/EUR rate coming down from an 18 month high, and GBP/USD down from a 2.5 month high, we will look at the Pound Sterling Forecast and Euro rate forecast, and if exchange rates will go up or down through February 2012.
In this week’s Report:
• Bank of England to resume Quantitative Easing this week?
• Pound/US Dollar drop from 2.5 month high
• Pound/Euro predicted to fall from near 18 month 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;
Sterling’s week against the Euro remained relatively range bound with data releases having little effect on the pairing. Most investors spent much of the week holding out before making any serious moves as they waited for a conclusion to the Greek debt problems and a potential bail out through private creditors. “There’s not very much news coming from the UK market at the moment, I think really it’s all about what we’re seeing in Europe,” said Sara Yates, FX strategist at Barclays.
Analysts said the market was likely to take direction from the Greek debt talks, though concerns about debt problems in Portugal, where yields on government debt have hit record highs, may weigh on the single currency.
Despite the lack of movement in the market there were a couple of key data releases that may have a longer term impact on the market. On Wednesday the UK saw a surprising upwards movement in the Manufacturing sector with PMI data. Purchasing Managers’ Index (PMI); is a leading indicator of economic health – businesses react quickly to market conditions and their purchasing managers hold perhaps the most current and relevant insight into the company’s view of the economy.
The survey is taken from about 600 purchasing managers in order to gain a consensus and a reading of above 50.0 indicates growth and a reading of below 50.0 indicates a contraction in the market. This month reading of 52.1 was a welcome surprise from the expected reading of 51.1.
Although January’s manufacturing PMI partially eased some of the UK’s economic worries, it made little to change the market’s forecast of more quantitative easing by the BoE this week, which is likely to undermine the pound in the near term.
Peter Allwright, head FX trader at fund manager RWC Partners summed up the mood of the market perfectly when he said “One still cannot paint a rosy picture for the UK. But having said that, there is nothing to get excited about the euro either”.
One potentially influential event happened on Thursday and yet virtually no press given to it. Chinese Premier Wen Jiabao said China was “investigating and evaluating concrete ways in which it can, via the IMF, get more deeply involved in solving the European debt problem”.
Whilst one could argue that the reason it was not widely publicised was due to the fact it is unlikely that anything will come from it and it is all just rhetoric, there is the train of thought suggesting that if this effort were to come up with something that is applicable and sustainable in the long term, then it could potentially change the whole nature of the Euro debt crisis.
Euro purchasers would do well to bear this in mind with a view to their currency movements and remember that there are a great many factors pressing on the GBP/EUR cross. Despite the recent Euro weakness the Pound is still far from a reliable currency with which to bank on its performance.
Sterling vs. US Dollar;
Despite some poor UK data and the chance of a Euro break up sending the UK economy into a second recession, sterling hit a 2 ½ month high against the Dollar in the latter part of last week. This was mainly due to Mr Ben Bernanke (chairman of the Fed) announcing that the US interest rates are likely to remain near zero until late 2014. That coupled with the likelihood of QE3 in the US hurt the dollar across the board. A weaker Dollar is cheaper to purchase, hence the climb in rates.
The GBP/USD rates were also being supported by a more optimistic outlook for riskier currencies and data from the UK which pointed towards growth in the UK construction and manufacturing sectors. However, continued worries over the UK economy and the growing likelihood that the Bank of England will also announce an increase in its asset purchasing program on Thursday of this week to support the UK’s flagging growth, is likely to keep the pound in check. That said, the survey of UK manufacturing released last Wednesday did ease some worries about the UK economy after the contraction in the 4th quarter of last year.
To end last week, on Friday the eagerly awaited US non-farm payroll came out up 243000 which was well above the expectations of 140,000 and saw cable drop off from recent 2.5 month highs to the mid $1.57s (interbank rate).
Looking ahead, due to the fact that sterling is increasingly linked with global growth prospects because of its reliance on exports, any movement in the GBP/USD cross in the medium term will partly be due to evolving news on the global debt crisis. Although the main mover of cable in the short term will be the UK interest rate decision (which is highly expected to be kept on hold) and the possibility of more QE3 on Thursday.
Last week saw GBP/USD rates move between the $1.56 and $1.5850 range (interbank). To put this into real terms, a purchase of $200,000 would have a difference in cost of £1500.00 between the highs and the lows of last week, outlining the importance of staying in close contact with your FCG account manager.
With rates now falling from the recent 2.5 month highs, and further falls possible due to the risk of further Quantitative Easing by the Bank of England, most forecasts now seem to suggest rates heading back towards $1.50. For this reason, if you need to buy US Dollars in the next 3 to 6 months, contact us today to discuss how we can protect against adverse exchange rate movements.
Weekly Economic Data that may affect exchange rates
Monday – The only UK release of note today is House Price data from the Halifax. There are some investor confidence measures for the Eurozone in addition to German Factory orders. Further afield, Australia releases Retail Sales, Construction performance and Jobs data.
Tuesday – Another quiet day for the UK with only Retail Sales data from the BRC being released. Australia has an interest rate decision; GBP/AUD is already at record lows. In the Eurozone the only data is German Industrial Production. In the afternoon the USA releases its latest measures of Consumer Credit and Economic Optimism.
Wednesday – Another fairly quiet day as markets brace for tomorrows central bank decisions. Today we have some Trade Balance figures from Germany, Employment data for New Zealand and US Mortgage Applications.
Thursday – By far the most important and anticipated day of the week, and lots to cover so bear with me! We’ll start in the UK with some minor House Price data, followed by Industrial and Manufacturing Production and Trade Balance figures late morning. At 12:00pm we will see the Bank of England’s latest decision on Quantitative Easing and Interest rates.
It’s predicted that rates will be left on hold, but there is a very high change the BoE will increase its QE programme by up to £75bn which could weaken Sterling significantly. Also, at 15:00pm there is the NIESR GDP estimate for the UK, which could indicate the UK is heading back into recession. There is much today that may affect Sterling exchange rates.
In the Eurozone there is also an interest rate decision where rates will probably be left on hold. The US has various jobless measures in the afternoon.
Friday – Market will continue to react to the raft of data released on Thursday, and also today we will see German inflation data. In the UK we also have lots of inflation data that could affect interest rates in the future. We end the week with US Trade Balance numbers and a budget statement from the Federal Reserve.
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