Monday 13th February 2012
Good morning. So, the start of a new week in the currency markets, so a review of the last weeks movements is in order, in addition to forecasts for Pound/Euro and Pound/Dollar, and the weeks economic data releases that I think will affect exchange rates.
In this week’s Report:
• Bank of England announce £50bn Quantitative Easing
• Greek Bailout – will they or won’t they?
• Forecasts for GBP/EUR and GBP/USD
• 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;
Events in the euro zone continued to drive currency movements with Sterling beginning the trading week with a rise against the euro as Greek politicians struggled to find a consensus on bailout terms, heightening anxiety over the debt crisis in Europe. Failure to secure a second bailout would result in an unruly default by Greece on its sovereign debt.
Last week’s run of positive UK economic data gave some added support to sterling, though it seemed unlikely to dissuade the Bank of England from announcing an increase in the asset purchase programme (Quantitative Easing) that has been weighing on Sterling. Quantitative easing involves flooding the market with more pounds and is usually negative for the currency.
As expected and predicted here on the Blog last week, the BOE left its key interest rate at a record low of 0.5 per cent on Thursday and said it would buy another 50 billion pounds of assets mostly government bonds with freshly printed money. This resulted in Sterling falling into the high 1.18 level before recovering on an accompanying statement in which the BoE sounded more upbeat, saying recent surveys painted a more positive picture of the UK economic recovery however Europe’s debt crisis still posed the biggest risk going forward.
Developments in Greece remained firmly in focus to see out the week. Greek political leaders said they had clinched a deal on economic reforms needed to secure a second EU bailout, but euro zone finance ministers demanded more steps and a parliamentary seal of approval before providing the second bailout. A Crucial parliament vote was due over the weekend or today.
So despite the QE uncertainty now being settled, rates could go either way depending on developments in the Eurozone in particular Greece.
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Sterling vs. US Dollar;
Last week saw the Pound make steady gains against the Dollar despite fears that Thursday’s announcement of more quantitative easing by the Bank of England would weaken Sterling across the board and drive GBP/USD rates down.
Conversely, Sterling Dollar rates actually climbed half a cent at the time of the announcement as investors saw the Bank of England’s decision as a positive step towards stimulating economic growth.
Subsequently, investors moved away from the perceived safe-haven of the US Dollar and into riskier currencies, benefiting the Pound and driving GBP/USD rates upwards.
As has so often been the case recently, it is difficult to comment on the movement of Cable, without mentioning the effect the current Eurozone crisis is having on the currency pairing. In what seems to be a never-ending saga, all eyes were on Greece last week as it was hoped that they would reach an agreement on austerity measures and avoid a disorderly default. The belief that a deal would be struck broadly buoyed riskier currencies, strengthening the Pound and weighing heavily on the safe-haven Greenback, driving Cable up to 1.5929, its highest level since mid – November.
The Bank of England sounded a bit more positive about the UK’s economic prospects last week after better than expected PMI data was released on Thursday. Recent surveys had painted a more positive picture and inflation is expected to undershoot 2 % in the medium term without the need for further adjustments in monetary policy.
The Pound was further boosted after UK industrial data beat forecasts and the trade deficit narrowed more than expected. However, Sterling’s rally proved to be fleeting as GBP/USD rates dropped off sharply on Friday, dropping around a cent over the course of the day, after a reversal in risk sentiment as investors once again moved towards the safe-haven.
“We have a slightly more risk averse environment today but sterling has performed relatively well in the aftermath of QE,” said Simon Derrick, head of currency research at Bank of New York Mellon. Analysts said further jitters about Greece would probably push the pound higher against the euro, but put it under pressure against the safe haven dollar. GBP/USD ended the European session last week in the mid $1.57s.
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Weekly Economic Data that may affect exchange rates
Monday – We ease into the week with a quiet day for fundamental data releases. Of note we have German wholesale prices and a press conference with US president Barack Obama, where he is giving a speech on a range of issues including the economy, which may have an indirect impact on the financial markets.
Tuesday – Today is much busier, particularly for the UK. The key releases are House Prices, Consumer Price Index and Retail Price Index. All of these are a barometer of inflation and economic activity. In the Eurozone there are measures of Industrial Production and Economic Confidence. In the USA we have Import Prices, & Retail Sales. There are also Retails Sales released in New Zealand, and Consumer confidence measures from Australia.
Wednesday – We kick of the German GDP data at 7am, followed by a raft of UK data at 09:30am including Average Earnings, Unemployment, a BoE inflation report and a speech by BoE governor Mervyn King. We will also see EU wide GDP and Trade Balance figures. In the USA there are some Industrial production figures followed by the Federal Open Market Committee (FOMC) minutes.
Thursday – Let’s start in Australia where we will see Inflation data in addition to unemployment figures. In Europe a report is released by the European Central Bank. Further afield in the states we have various Jobless measures and various numbers showing inflation. After all the data is released one of the FEDs members gives a speech.
Friday – A busy end to the week as the world’s finance ministers meet for the latest G20 meeting. We also see UK Housing Prices & Retail Sales. We end the week with measures of inflation for Germany and the EU and the USA.
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