Friday 13th April 2012
Good Morning. Since my last post on Tuesday morning, markets have remained fairly flat with little happening to affect exchange rates. Indeed yesterday Sterling surged to a 19-month peak on a trade-weighted basket of currencies, highlighting the strength of the Pound at the moment.
Pound remains around the €1.21 range vs the Euro
Against the Euro, we saw rates climb initially yesterday, hitting a peak of €1.2160, which is pretty much the best we’ve seen in 20 months. Rates did take a slight dip however as the day progressed, falling back to the €1.21 level by the end of the day.
The main reasons for the climb early on was concerns over Spain’s fiscal position, and this weakened the single currency slightly.
UK Exports fall, worrying UK policy makers
The UK’s trade deficit widened in February as exports of goods to non-EU countries dropped, figures have shown. The deficit on the trade in goods and services increased to £3.4bn from a revised £2.5bn in January, the Office for National Statistics (ONS) said. Due to this, we saw the GBP/EUR currency pair steadily fall back to where they were earlier in the week.
“The sterling move right now, in their heart of hearts, they (the BoE) would probably prefer not to happen,” said Simon Derrick, head of currency research at Bank of New York Mellon.
This is because throughout the financial crisis, policymakers in the UK have been trying to re balance the UK economy through higher exports, especially as domestic demand remains soft amid fiscal tightening and rising unemployment. So, the hope was that increased exports to the EU would help the UK economy grow again.
The reason for the fall is two fold, firstly exports of goods to non-EU countries dropped due to the well publicised debt problems surrounding some EU countries. Also, the general strength of the Pound of late has not helped. While a strong Pound is great for those needing to buy foreign currency, it’s bad news for anybody needing to convert foreign currencies into Sterling, as the Pound has now become more expensive to purchase.
So will the Pound now continue to gain against the Euro?
If UK figures continue to surprise to the upside, then it could continue to rise, however we have actually seen rates remain fairly flat, which suggests to me that we may well have already hit the peak with the Pound struggling to make any further substantial gains.
It should also be noted that the UK is exposed to the EU debt crisis, partly because we are a large trading partner, and partly due to the fact our banks are exposed to a very large portion of the debt. For this reason, while the EU problems keep the Euro weak, they also could start to pull the Pound down also.
Pound gains against weaker Dollar
We saw Sterling gain through most of the day against the US Dollar, but again the trend was not to continue. Jobless Claims and annual inflation data was worse than expected, weakening the USD and making it cheaper to purchase and as a result, exchange rates went up.
Later in the day however, we saw much better than expected Trade Balance data, in addition to further inflation data that beat forecast. This was an excellent example of how data that is different than forecast can affect exchange rates.
Economic data releases are always forecast ahead of time, and these forecasts dictate market prices as they are priced in to exchange rates. Therefore when data comes in as forecast, regardless of whether it is good or bad news, it generally doesn’t have a huge effect on rates. Yesterday however you can see the effect the worse than expected figures had when exchange rates rose, and then the opposite happened when the surprisingly good Trade balance figures were released.
This is why it is important to keep abreast of upcoming data releases as they often have quite a big impact on exchange rates.
There are quite a few releases today. For the UK we have a host of varying inflation data released at 09:30am. As explained above, if the figures are different to forecast it could affect Sterling exchange rates.
We also have similar inflation data from Germany and the US, so lots that could affect GBP/EUR rates and GBP/USD rates.
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