Sterling/Euro Forecast, Sterling/Dollar, Fundamental Data

Monday 26th March 2012

Good morning. Regular Readers will notice the blog has had a Spring clean and a fresh new look for the new season. While the look of the blog has changed, the content has not – knowledgable currency reports to help you decide when to convert your currency, and commercial exchange rates that are significantly better than you can achieve elsewhere. As always for a Monday, today we will look at last weeks movements in exchange rates.

In this week’s Report:

  • UK Budget has little impact on exchange rates
  • Sterling/Euro remains range bound at €1.19/€1.20
  • Pound/Dollar climbs near $1.60, but forecasts mixed
  • 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 began positively for Sterling as it climbed to a 13-month peak against the euro on a recent run of improved UK data. Additionally, there were no surprises in the UK budget, but analysts warned that the key to whether sterling would sustain a bounce will be the response of ratings agencies, which may express concern if the budget focuses too much on growth-boosting measures at the expense of deficit-reduction efforts.

Sterling slipped on Tuesday but remained close to its recent highs after UK inflation eased less than forecast in February, but focus remained on the Chancellors Budget announcement. Wednesday morning saw Sterling fall away from the 13-month high by a little over 0.5% after the release of much higher-than-anticipated public sector borrowing for February. Any future deterioration in the borrowing figures could persuade ratings agencies Fitch and Moody’s to carry out their threat to downgrade the UK’s prized AAA sovereign debt status, which in turn could be a potential source of weakness for the UK currency.

The BoE minutes later in the day contributed to further weakness as the minutes returned a little more negative than most analysts were expecting. George Osborne’s much anticipated 2012 Budget however was perceived as largely neutral for Sterling, the chancellor was seen to be sticking with the coalition government’s austerity drive which aims to bring the country’s finances back into line in five years.

Sterling fell a further half a per cent on Thursday, after weak UK retail sales data resurrected concerns over a lack of growth in the UK economy, fuelling a reversal in speculation of more Bank of England asset purchases (QE). Retail sales suffered their biggest monthly drop in nine months in February, with further disappointment coming from sharp downward revisions to January’s releases.

The Pound ended the week on a much quieter note with Friday bringing little in the way of the volatility we had seen during the rest of the week. If this week demonstrates one thing, it’s that the outlook for the UK economy and Sterling is far from certain. The economy continues to send out mixed messages and if you have an impending currency requirement the market uncertainty could leave you paying significantly more for your currency than is necessary.

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Sterling vs. US Dollar;

After experiencing a seven week low in mid-march, the GBP/USD rate strengthened last Monday and crossed the $1.59 barrier (interbank) which was the highest level seen since the beginning of March.

In the early part of the week the GBP/USD remained flat as the markets awaited key data in the form of Bank of England minutes and the UK budget. The minutes showed a surprisingly negative slant as rate setters Adam Posen and David Miles pushed for more quantitative easing to try to stimulate the economy. Sterling subsequently slipped against the dollar with this news and is a stark reminder for investors that the British economy is still in a vulnerable position.

“Sterling is being moved a lot more by what’s going on elsewhere but I was shocked by the dovish nature of the minutes as most people thought more QE in May was off the table and this puts the risk of it back on,” said Kathleen Brooks, research director at FOREX.com.

The following day the pound showed little reaction to what analysts and ratings agencies described as a fiscally neutral UK budget. Fitch ratings said finance minister George Osborne’s proposals showed commitment to deficit reduction and would not impact the UK’s AAA rating. The outlook for sterling depends on the economy – it could take a long time for recovery to take root, and sterling probably will only rally when there are signs that’s happening. “About the best you can say of the budget was that it won’t hurt” said analysts at Societe Generale.

It was a busy week in the US for data with most of it having little effect on rates. But unemployment data released last week showed a drop to the lowest level in four years, reinforcing signs the U.S. labour market is picking up. Jobless claims also decreased by 5,000 to 348,000 which continue to keep rates at a decent level.

GBP/USD has been choppy recently with the mixed economic figures coming out of both countries. We continue to see the pair make moves in both directions and many analysts are torn over their forecast with some thinking that the cross will end up towards the $1.50 level within the next twelve months, and others believing firmly that the 1.60 barrier will be broken very soon.

With so much volatility between the GBP/USD, it’s wise not to leave things to chance. If you need to buy or sell dollars, send me a free enquiry now to find out what rate I can achieve for you.

Weekly Economic Data that may affect exchange rates

MondayWe start the week in the UK with Nationwide Housing Prices. At 9am Germany releases sentiment measures including Business Climate, Current Assessment and Expectations. Stateside we have some Home Sales Data at 3pm.

TuesdayGermany has the first release of the day, with Consumer Confidence released at 7am. At 09:30am UK data starts to flow, with GDP figures and Business Investment measures. GDP in particular could have an effect on Sterling. There is also a Trend Survey from the UK today. Other data today is from the USA: Home Prices, Consumer Confidence, Manufacturing numbers and a speech by FED chairman Ben Bernanke.

WednesdayWe start in Germany again today, with inflation numbers at 7am. A few hours later the EU releases money supply data. US figures this afternoon include Durable Goods orders. There are no releases of note today from the UK.

ThursdayGerman unemployment is released today, but most data is from the UK: Consumer Credit, BoE Credit report, Money Supply, Mortgage Approvals and net lending. All of this is released at 09:30am so watch for any effect on the Pound. We also have UK Confidence measures released in the evening. Before that there is a host of US data including GDP, Jobless Claims, Industrial Production and another speech by Ben Bernanke.

FridayThere are no UK releases today. To end the week we have German Retail Sales, EU Consumer Confidence. Stateside watch for Personal Consumption Expenditure figures, Inflation data, and a consumer sentiment survey.

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