Monday 25th June 2012
Good morning. As always for Mondays today I’ll have a look back at last weeks events, what moved the market and the Pound Sterling Forecast for future exchange rate movements. Also I will outline the most important data releases of the week that could affect rates. In this week’s Report:
- More UK Quantitative Easing on the cards
- Spain could be next to seek bailout
- Greece forms government, calming exit fears
- 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;
It was a pretty quiet week on the rate front for GBP/EUR last week however the news and data released could have caused it to be much more volatile.
Greek Election Result
Firstly the Greek election results seemed Euro friendly as the New Democracy party was voted in with a slight majority over the anti-austerity Syriza party (without gaining enough seats to become THE majority party), as it reduced the likelihood that the Greeks would leave the Euro in the short-term, while pointing towards more favourable negotiations with the “Troika” (EU, ECB, IMF). However the fact that the Syriza party still managed to gain 26.9% of the vote (with the New Democracy party achieving 29.7%) showed the disquiet amongst the Greek population surrounding the currently agreed package.
As we moved through the week the negotiations between pro-bailout parties to form a coalition government continued until the the head of the ND party Antonis Samaras was finally sworn in as Prime Minister as head of a three party coalition government on Wednesday. This however didn’t give the Euro the push that we thought it would get as Germany continued it’s opposition to giving Greece any leeway on the current tough bailout conditions.
At the same time the Bank of Spain revealed that bad debts had risen to 8.7% of total lending for April which is the highest level for 18 years and further increased concerns over the country’s financial sector. This caused the 10 year Spanish bond yield to peak at 7.3%; this level is seen as unsustainable and is the level where other struggling Eurozone economies have sought bailouts. So while things seem to be calming in Greece at least in the short term, the eyes of the world will soon be firmly fixed on Spain which could be a much bigger problem.
Even news that Eurozone policymakers were discussing plans to reduce borrowing costs for countries under stress didn’t give the Euro any strength and we saw the mid-market rate start to climb from the week’s low of 1.2350 towards and over 1.24.
More Quantitative Easing?
Let’s not forget however that the UK is still in recession and on Wednesday the Bank of England minutes showed a much closer decision than forecast. While interest rates were held at their current all time low, the vote on further Quantitative Easing [QE] measures (previously 8-1 in favour of maintaining the current levels of monetary stimulus) showed a 5-4 split in favour of a hold. One of the members who have changed their stance towards more QE is the Governor Mervyn King and markets are now expecting another round to be announced at the next meeting on 5th July.
The last time this happened the Pound lost nearly 3 cents against the Euro in one trading day, but this was last October and was before the problems in Greece were quite as well known as they are now. After the minutes the initial drop in the Pound of half a cent was reversed later as we saw UK unemployment fall 51k for the first three months of the year, and retail sales showed an increase to 1.4% in May after the sharp April decline, and UK factory orders also showed an improvement.
Please don’t be fooled by the relative calm in the rate that we are seeing as both UK and Eurozone economies are still finely balanced and any further bad news out of Spain or Greece, or any kind of revision in UK GDP for quarter one that is released on Thursday could cause huge movements in the rate.
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Sterling vs. US Dollar;
Last week was yet another of Dollar strength remaining, broadly based on the currency’s safe haven status. Cable remained relatively range bound moving little more than 2 Cents throughout the week and not reacting in line with the host of disappointing data releases in the US throughout the course of the week. Both industrial production and manufacturing figures came in lower than were expected and so too did an employment data survey as well as home sales report.
Although this is welcome news for Dollar sellers, it provides little comfort to Dollar purchasers as it illustrates that Sterling positive (and Dollar negative) data seems to have little effect on the cross at the moment. The position of the GBPUSD cross seems to be governed by a far more macroeconomic and global viewpoint of the markets and the fact that in these time of uncertainly there is a clear flight to safety in the Dollar’s safe haven status.
This was evident by the fact that Sterling’s only actual gain against the greenback last week came on Tuesday following a rise in equities and commodity prices and hence investors took a movement away from the safety of the Dollar.
The Dollar’s Strength isn’t a forgone conclusion as due to a run of poor data releases in the US, the Government have been forced to take action keep the economy turning and try to stimulate growth. They therefore extended operation ‘Twist’ which, although isn’t quite as dramatic as Quantities Easing is design to have a similar effect on the market and kick start the economy by encouraging spending. Since the Federal Reserve’s short-term interest rates are already at rock bottom, the bank plans to stimulate borrowing by dragging down the yields of long-term interest rates and thus make it a less attractive proposition.
The fact that the US have had to initiate this program shows that the US is struggling in the same way that economies in Europe and the rest of the world are and we may indeed see the Greenback weaken against the other major currencies as a result. Those needing to sell Dollars should certainly take this into consideration as even if it doesn’t weaken the Dollar by much it will most likely act as a limit to the gains the Dollar may be able to make.
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Weekly Economic Data that may affect exchange rates
Monday – The week kicks off with some German Import Price data and consumer confidence measures. Germany, Europe’s largest economy also releases its latest Retail Sales figures. Later in the day there is a Speech by the European Central Bank. Back in the UK Nationwide releases the latest house prices which are an overall barometer of the economy. In the states we see Home Sales.
Tuesday – Relatively quiet today, with only Public Sector borrowing from the UK. The rest of today’s data is from the United States: Consumer Confidence & Manufacturing figures.
Wednesday – Today’s main UK release is the latest Mortgage approval numbers. We have a raft of inflation figures from Germany at 1pm. Later in the afternoon the US has its latest durable goods orders, homes sales and consumption expenditure data.
Thursday – As is often the case, today is the busiest day of the week for fundamental data. There European council meets, with the debt crisis likely to dominate the agenda. Staying in the EU we see German unemployment, EU consumer confidence, Industrial Confidence and Economic Sentiment. The UK has its latest GDP figures to show if we are still in recession, in addition to consumer confidence numbers released this evening. The US also has its latest GDP figures in addition to Jobless numbers.
Friday – The EU council continues its meeting today, during which the EU releases its money supply data and Inflation numbers. The USA has its latest inflation numbers and consumer sentiment measures, followed by a speech from the FED.
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