Weekly Pound/Euro & Pound/Dollar forecast

Monday 30th July 2012

Good morning. It’s a new week, and as regular readers will know, it’s when I take a detailed look back over the Sterling/Euro and Sterling/Dollar exchange rate, and take a look at whether rates will go up or down in the coming weeks. So, what’s been happening?

  • GDP figures show recession worse than thought
  • ECB will do ‘whatever it takes’ to save Euro
  • Pound/Dollar hits 5 week high, Pound/Euro in decline
  • Round up of the week’s other data that may affect rates

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Sterling vs. Euro;

Last week saw minor retracements of the Euro’s relative weakness against the pound. The GBP/EUR cross fell from Tuesday’s high of 1.2856 finding support around the 1.27 level. In this week’s report we consider the announcements that generated these movements.

Last week saw Moody’s deliver a blow to the stronger Euro-economies by placing Germany, Luxemburg and the Netherlands’ AAA credit-ratings on negative watch. The announcement, tarring the nations as guilty by association, highlighted two increasing fears for the single currency; a Greek exit from the Euro and the high likelihood that the strongest Euro members might be called upon to provide more financial support for countries that have not yet received bailouts, namely Italy and Spain.

However, Euro woes were offered a momentary reprieve on Thursday via an announcement from the ECB President Mario Draghi. The president’s “bumble-bee” speech vowed to do whatever it took to save the Euro, claiming that “the Euro is irreversible”. Realistically, the only measures available to the ECB will be to again cut their main interest rate by another 25 basis points and to create a negative deposit rate.

This approach, if introduced, would undoubtedly weaken the Euro further. Not only this, but if Citibank’s claim that there is a 90% chance that Greece will leave the Euro proves to be true, contagion fears could become reality affecting Spain, Italy, Portugal, and as Moody’s have highlighted, those who would be forced to bail them out.

Last week’s fall in the GBP/EUR cross must also be attributed to the UK’s second quarter GDP results. On Wednesday official figures stated that the UK economy shrank by a greater than expected 0.7%. Despite 0.5% of the fall being attributed to the additional bank holiday, the most significant factor from the report is that the British economy is still shrinking. Calls for the “work experience” chancellor to be removed are unlikely and Vince Cable will have to continue to play his part from behind the scenes. However, the Coalition is placing significant emphasis on the Olympic Games as a source of recovery, expecting the event to bring about a third quarter rally.

Looking ahead to this week, the most significant announcement will arrive Thursday as the Bank of England prepare to deliver their intentions with regard to interest rates and the potential for more quantitative easing. All those following currency rates will be watching with intent, as without doubt, whatever the Bank of England’s proposal for economic stimulus: the currency markets will react in kind.

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Sterling vs. US Dollar;

The Sterling/Dollar rate was in decline for most of last week, however on Thursday and Friday the fortunes of cable were reversed and we saw the Pound hit a 5 week high against the dollar, tracking gains in the euro and other riskier currencies as speculation of European Central Bank action lifted investors’ appetite for buying riskier assets and currencies.

The reason for the GBP/USD fall mid-week emanated from the UK and Eurozone, as has been the case for some time now. The poor UK GDP figures mentioned in the Euro section were the main reason for the decline, as the economy slumped far more than expected during the second quarter.

Having said that, the fortunes of cable were reversed later in the week. Firstly the comments from the ECB president, also mentioned in the Euro report, caused confidence to return to the markets. In recent times fears over the future of the Euro has caused investors to seek the safe haven of the US Dollar, which in turn has been causing it to gain strength. The ECB support for the Euro caused risk appetite to return, bolstering riskier currencies such as Sterling. The net effect of this was a weakening of the Dollar and a rise in GBP/USD rates to the best in over a month.

We also saw the latest US GDP figures on Friday, showing that the US economy slowed in the second quarter as consumer spending eased, compounding the weakness in the Dollar.

Last month, the US Federal Reserve cut its forecast for economic growth and the figures made dismal reading for the White House. The US economy is still growing but only just and at nowhere near the level required to make a significant dent in high levels of American unemployment, which in turn is bad news for President Obama’s chances of re-election in November, however any worry will be tinged with a sprinkle of relief: the figures could have been worse.

The recent gains could well be short lived however, as sterling may be vulnerable to more weakness in the coming weeks as investors price in the prospect of further QE by the Bank of England, or even a cut in interest rates.

This week, watch for the latest interest rate decision from the US and UK on Wednesday & Thursday respectively, and the US Non-Farm payroll numbers on Friday, all of which could cause significant market volatility.

It is of course impossible to predict market movements, however if the economic data from the states this week continues to be weak, then it is more and more likely that the US will opt for more Quantitative Easing. However with the UK also expected to either cut rates/pursue more stimulus, it’s likely that events in the Eurozone will continue to drive the USD’s value. If the bad news keeps coming out of Europe, expect Pound/Dollar rates to retreat back down as its safe haven status comes back into focus. This is likely to be the case until political uncertainty takes the driving seat towards November.

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Weekly Economic Data that may affect exchange rates

MondayThere is a good mix of data today. Starting in the UK we have Consumer Credit, Consumer Confidence measures and Mortgage approvals. Moving to the Eurozone we have the estimated GDP figures, Retail Sales, Consumer Confidence, Economic Sentiment and Industrial Confidence.

TuesdayStarting down under today we have Australian Building permits and New Zealand Business confidence. There is no UK data of note today. In the Eurozone we have Producer Prices, Unemployment and Spanish Retail Sales. Over in the states we have some inflation numbers, Consumer Confidence and Home Price Indexes.

WednesdayThe start of a new month, and the European Council meeting starts today. Staying in Europe we see Spanish Inflation data & French Manufacturing data. Fairly quiet in the UK with a bond auction the only data of note. In the states we have an interest rate decision from the FED, construction and manufacturing spending.

ThursdayAn important day for the UK today as we have the Bank of England interest rate and QE decision both of which will likely drive Sterling value in the coming months. In Europe we also have an interest rate decision so could be interesting for GBP/EUR today. Elsewhere we have Australian and Swiss Retail Sales, and various jobless and unemployment measures from the USA.

FridayWe end the week with a host of data from the Eurozone including Retail Sales and Inflation data. There are no UK releases of note. In the states we have the all-important Non-Farm Payrolls data in addition to various other measures of unemployment.

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