Monday 30th April 2012
Good morning. As always for a Monday morning, today I’ll take a look back over the last weeks events in the currency markets, and the forecast for where GBP/EUR rates may go in the next few months. It was certainly a very interesting week with the UK officially back in recession, but despite this, GBP/EUR rates are at a 22 month high, and GBP/USD rates at a 7 month high. So without further ado let’s find out why!
In this week’s Report:
- UK returns to recession
- Pound remains strong vs. Euro and US Dollar
- EU political uncertainty weakens Euro
- Round up of the week’s other data that may affect rates
(For currencies other than GBP, EUR and USD, contact us for a consultation)
Sterling vs. Euro;
What could have been a very bad week indeed for the Sterling/Euro cross ended up with Sterling sitting on a 22 month high against the Euro, despite the UK going into recession.
The start of the week saw the markets waiting in anticipation for the GDP figures which were released on Wednesday with most analysts believing that the UK economy would continue to grow. News came out that the economy had shrunk by 0.2% which led to a sharp downward spike in the markets pushing the interbank into the mid-1.21s.
It was a big surprise that the UK had slipped back into a double dip recession, the first since the mid ‘70s, especially as UK consumer confidence is at a nine month high, showed by figures released by the Nationwide Building Society. Despite the figures showing contraction, the GDP figures will be revised several times in the next 6 weeks, which is another reason the markets didn’t react too much to the news, as the revised figures could of course show that we are not in recession after all.
GBP/EUR rates briefly flirted with the idea of dropping below the 1.21 level, but the drop was short lived and gains were quickly seen for Sterling as it climbed back up towards the highs that we have seen recently. Fundamentally the Euro zone still has its problems and these seem to outweigh the fact that the UK is back in a recession, hence the reason why rates remain supported at high levels
The Euro dropped further against the pound as the fragility two Euro governments came to light. The French elections are rumbling on with Sarkozy losing in the first round, and Dutch Prime Minister Mark Rutte resigning due to losing the support of the liberal-conservative coalition government sending the Dutch Government into crisis.
Also weakening the Euro was news from the Bank of Spain, when they said that their economy contracted by 0.4% for the first 3 months of the year plus by 0.3% in the final quarter of last year. This bad news was further compounded when Spain was hit by the news that rating agency Standard & Poor’s downgraded its credit rating.
All of this has helped the pound keep its strength against the Euro which is now at a 22 month high. It means that this is potentially a good time to buy Euros, so if you haven’t already spoken to your FX Trader it is time to do so. Even if you don’t need your funds for some time, with a ‘Forward Contract’ you can fix the current rate for up to 2 years into the future, and only lodge a 10% deposit of the total you want to convert.
Sterling vs. US Dollar;
What a week it’s been for the pound/dollar cross, after Wednesdays news that the UK slipped back into recession cable jumped to its highest levels for seven months to $1.6230 as the graph below shows. Dollar weakness was the main driver as Fed Chairman Ben Bernanke left the door open for further monetary stimulus.
After a relatively stable start the week the GDP data release on Wednesday saw Sterling fall away as the UK economy fell back into recession. As the data was released rates fell from $1.6160 to 1.6080 before recovering throughout the day and pushing back over the $1.61 mark.
The UK economy slipped back into recession after contracting by 0.2% during the first three months of 2012. A recession is described as two consecutive quarters of contraction and the recent results follow on from the fourth quarter of 2011 where the economy dropped by 0.3%.
The news that the UK economy had shrunk for a second consecutive quarter came as a bit of a surprise, over the last few weeks we had seen a batch of positive data support claim that the UK could avoid the double dip. However, a fall in construction output was believed to be the reason behind the unexpected contraction.
You would think that the UK heading back into a technical recession would have led to further losses for the GBP/USD cross. But with U.S unemployment being so high it was always likely that Mr Bernanke would keep the door open for further monetary stimulus; these thoughts were also supported by the US data release that core durable goods orders contracted by 1.1% when the forecast had been for 0.6% growth.
On the back of the Fed Chairman’s speech Sterling climbed to its highest level for more than seven months against the dollar, Mr Bernanke said that U.S monetary policy was “more or less in the right place” but the central bank would not hesitate to enter into another round of quantitative easing if the U.S economy were to weaken.
It seems the UK has bounced back from Wednesdays news as data released towards the end of the week showed that UK consumer confidence reached a nine-month high in March, according to the Nationwide Building Society, the confidence index increased to 53, up nine points from February.
There is so much uncertainty surrounding the U.S and UK economy, getting the timing right on your currency transfer remains critical, if you are buying or selling dollars in the coming months contact your FCG account manager to discuss the different options available.
Monday – We kick off the week with a host of data from the Eurozone: German Retail Sales, EU Money Supply and EU Consumer Price Index. In the afternoon we have Canadian GDP figures and Industrial Production, followed by Income data from the USA. There is no UK data of note today.
Tuesday – In Australia today we have an interest rate decision, and there is the chance of a cut. House Prices and commodity index is also released from down under this morning. UK data is quite light with only Purchasing Managers Index being released at 09:30am. We are data heavy from the US today including Construction Spending, Manufacturing, a FED Speech and vehicle sales.
Wednesday – We’ll start in the UK today where we see Halifax House Prices, Money Supply, Consumer Credit and Mortgage approvals. Over in the EU we see German Inflation data and unemployment measures, EU wide inflation numbers are also released. In the USA we will see employment data, mortgage applications and factory orders.
Thursday – We have Nationwide House Prices and UK PMI data this morning from the UK. In the EU we see Producer Price Index numbers, an Interest Rate decision and a speech by ECB president Mario Draghi. In the USA there is also another speech from the FED.
Friday – Starting in the EU we see German inflation data and EU wide Retail Sales. The main data today though is from the USA where we see Non-Farm Payrolls, which often causes volatility for GBP/USD rates. Staying in the states we also see average earnings and the unemployment rate.
Getting the best exchange rates
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