Monday 27th February 2012
Good morning. A new week, and as usual I will take a detailed look at the last weeks movements in Sterling/Euro, Sterling/US Dollar and the forecasts for where rates are headed through 2012. I will also list the weeks economic data releases that I think will have the biggest impact on exchange rates.
In this week’s Report:
• Pound falls to 10 week low vs. Euro
• Dovish BoE Minutes pushes Sterling down
• Greek debt crisis – is it really over?
• 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;
Last week saw the single currency gaining on investor relief that Greece’s second bailout package was agreed by European authorities. The end of the week saw the GBP/EUR Interbank rate around the 1.18 level, and the sharp decline is clearly illustrated in the chart below:
The start of the week saw the Euro strengthen against the Pound as the markets showed renewed optimism towards the Greek bailout fund being agreed. Talks progressed Monday and continued through the night. In the early hours of Tuesday morning Euro groups President Jean Claude Juncker announced that the €130bn agreement had been reached.
The Euro group made clear that reaching these debt levels was conditional on strict implementation of future policies. Greece would have to show that they are actively decreasing their debts, and accept a permanent presence of EU monitors to oversee economic management. The Euro did show gains through the day but not by much as many think it will not be the answer to Greece’s debt crisis and it is only helping to delay the inevitable Greek default.
Sterling reached a 10 week low against the EUR on Wednesday after the Monetary Policy Committee (MPC) minutes revealed an unexpected vote split with two MPC members voting in favour of more Quantitative Easing (QE). Analysts have expressed that further QE in May is highly unlikely and BOE actions will be tied to economic prospects. As a result the GBP/EUR cross fell from a high of 1.1928 to a low of 1.1820 with the pair opening slightly lower on Thursday morning.
The end of the week saw Sterling pull away from the 10 week low, although expectations of more monetary stimulus by the Bank of England could prevent the GBP/EUR cross hitting the 1.20 levels we saw earlier this month. It now seems that the UK economy may avoid another recession after a rise in customer spending and an upsurge in exports to help the UK economy bounce back, but the ever present threat of further QE will likely hamper any decent gains.
GBP/EUR has now broken €1.20 quite a few times in the last few years, but each and every time the spike is short lived and rates tumble back away. For those hoping rates will recover, recent UK data suggest the Pound will remain weak for some time to come.
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Sterling vs. US Dollar;
Last week was relatively quiet in the US after Presidents Day on Monday, but it did not stop it from being another volatile week for the GBP/USD cross as rates swung on the back of news from the UK and Europe. We started the week in the mid $1.58’s but as the week progressed we saw a sudden 1.5% drop as rates fell back into the $1.56’s before slowly recovering. To put this kind of movement into prospective a £200,000 trade would have seen you receive $4000 less on Wednesday than at the start of the week.
As news of the Greek bailout package came to light the GBP/USD cross began to move towards the highs we saw in October. However, Wednesday morning saw the Pound lose ground against the US Dollar as the Bank of England (BoE) minutes were released. In his last speech Sir Mervyn King announced that the bank would inject a further £50bn into the economy through its Quantitative Easing (QE) programme. However data has shown that two of the nine Monetary Policy Committee (MPC) members actually voted for a £75bn boost.
As soon as the data was released we saw rates drop across the board, the GBP/USD reacted by dropping briefly into the $1.56 level before recovering back into the low $1.57’s. With two MPC members voting for further stimulus it shows that some still believe the UK to be on fragile ground and believe the BoE should increase its asset purchasing programme. So far the bank has pumped £325bn into the economy since the UK credit crisis began.
With the recent gains from the from the Greek bailout and the positive data that has come out of the UK (retail sales and public sector borrowing) it shows how quickly the markets can move against you.
As the week progressed, news from Germany that business confidence was at a 7 month high would have given investors added belief that the Euro-zone could be about to turn a corner. When you have positive news coming from Europe investors tend to leave the Safe Haven status of the Greenback and head back into the bloc currency, this will lead to the dollar losing strength and make it cheaper to purchase.
With many analysts still concerned that the Euro is under threat any talk of a Greek default or a Euro recession could see the pound/dollar start to move back towards $1.50 as investors look to protect themselves with a flight to safety.
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Weekly Economic Data that may affect exchange rates
Monday – Today in the UK we will see House Price data from both the Halifax and Nationwide, showing how this sector is performing. It’s also a barometer of the economy as a whole and so could affect Sterling. German Retail Sales will also be watched and could affect GBP/EUR rates.
Tuesday – In the Eurozone today we will see measures of Economic Confidence, Consumer Confidence and Industrial Confidence. In Germany, there are some inflation measures and a Consumer Sentiment Survey, so lots that could affect the Euro. The only UK data of note is a CBI Trades Survey. In the USA we will see Consumer Confidence measures and Durable Goods Orders.
Wednesday – We start the day with German unemployment data, followed by inflation data from the Eurozone. In the UK we have Mortgage Approvals. Stateside the GDP figures will be closely watched to see how the economy is performing.
Thursday – The EU economic summit today could affect the Euro. In terms of Fundamental Data the most important releases are Swiss GDP, EU Inflation and Unemployment data, and US Jobless numbers. Also in the states we see Construction and Manufacturing numbers. Unusually for a Thursday there is nothing of note from the UK.
Friday – The EU economic summit continues, and there are further inflation numbers for the EU. There are some minor construction numbers from the UK, and GDP figures released from Canada at 13:30.
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