Tuesday 23rd July 2013
Good afternoon. It’s very quiet in the currency markets at the moment, with the media hype currently focusing on the Royal baby and a lack of any significant economic data releases. The Royal baby news had the same impact on the markets as the announcement that Peter Andre and partner are expecting – none whatsoever!
So in today’s report I will have a look at the most recent UK news that has helped Sterling, and a look at what other releases we have this week that might affect the currency markets. In today’s post:
- UK Recovery set to gather pace in 2014
- Government borrowing falls helping the Pound
- UK Growth figures released this Thursday
- How to get the best exchange rates
UK Recovery set to gather pace in 2014
The UK’s recovery will gather pace into next year, as exports and business investment help to boost the economy, Ernst & Young’s Item Club has predicted. The forecasting group predicted that UK economic growth would be 1.1% this year, rising to 2.2% next year and levelling out at about 2.5% thereafter.
These are fairly positive numbers and will do no harm to the Pound, however they also acknowledged that growth currently remains reliant on consumer spending and the housing recovery. Spending all relies on confidence, and the good economic news of late has bolstered this, and the good weather has also boosted retail sales recently, all of which has given the Pound a push.
“With consumer confidence returning and the government’s initiatives to stimulate the housing market bearing fruit, consumers are switching their attention back from saving to spending,” the report noted.
Elsewhere in America there is the risk of possible market reaction to the end of the Federal Reserve’s monetary stimulus programme. This could strengthen the US Dollar and push rates down below the $1.50 mark again. Also, in China there is the risk of an abrupt slowdown in its economy. This would weaken the antipodean currencies such as the Australian Dollar, which could give GBP/AUD rates a lift.
The other impact of a slowdown in China could be a strengthening of the Pound. This is because a successful re-balancing in China is expected to help the UK reduce its trade deficit in two ways – through more Chinese demand for UK exports of consumer goods, and less Chinese competition for the UK’s imports of raw materials used in the construction industry.
All in all the Pound has risen nicely since last week, however in the last few days has been very flat indeed. There have been no significant releases of note, so for the time being Pound/Euro remains range bound between 1.16 and 1.1650.
Government borrowing falls helping the Pound
Figures released this week shows that government borrowing fell in 2012-13. Public sector net borrowing was revised down to £116.5bn. It means that total borrowing actually fell, by £2.1bn, from the year before, contrary to a previous estimate in May.
The Office for Budget Responsibility (OBR) has forecast that total borrowing in the current fiscal year, excluding the effect of financial interventions and the deal with the Bank of England, will be about £120bn, or 7.5% of GDP. The lower figures also lent some support to the Pound.
UK Growth figures released this Thursday
The main data release this week will be Thursdays GDP numbers. The Gross Domestic Product released by the National Statistics is a measure of the total value of all goods and services produced by the UK. The GDP is considered as a broad measure of the UK economic activity.
I expect the Quarterly figure to show growth of 0.6%, and the year on year figure to show growth of 1.4%. These forecasts will already have been priced in to where exchange rates stand, so if the actual number is higher than this, expect Sterling to make gains. If the number is lower, expect a drop in exchange rates.
Other than some EU inflation numbers tomorrow, the GDP numbers are the most important release of the week in terms of what will affect exchange rates.
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