Currency Forecasts

Pound falls on debt fears.

Good Morning. Sterling slipped on Thursday as UK borrowing data underlined Britain’s deteriorating finances, while a sell-off in high-risk currencies also kept the pound under pressure. At 08:30am the snapshot of pound rates are as follows:

  • GBP/EUR 1.1141
  • GBP/USD 1.6610
  • GBP/AUD 1.8068
  • GBP/NZD 2.2744
  • GBP/CAD 1.7675
  • GBP/CHF 1.6849
  • GBP/ZAR 12.452
  • GBP/JPY 147.53
  • EUR/USD 149.05

Pound Falls
Sterling fell after data showing that the UKs public finances deteriorated at a much faster pace than expected in October, taking public borrowing to its highest on record. There was also a rise in Retail Sales for the UK, but the borrowing data overshadowed that and caused rates to fall.

Ratings agencies have said Britain may face a possible cut in its sovereign rating if its fiscal position gets worse. This would ruin the appeal of UK government debt and probably prompt investors to pull funds out of the country into other currencies percieved as safer. This will hurt Sterling in the Short to Medium term .

Analysts said the data highlighted the need for Britain to rein in borrowing or face the possibility of a ratings downgrade. Such measures, coupled with ongoing low interest rates would keep sterling weak in the medium to longer term. Despite this, the government continue to borrow more and more money, still trying to spend their way out of the problem.

In the Queens speech, the government stated it would pass law to ensure the deficit was halved within 4 years, however they did not mention how they were planning to do this. At all. Not even a hint (!). This is worrying, as it seems that it is adopting the Emu’s policy of dealing with problems, sticking it’s head in the sand and hoping it will go away. Excellent policy…

Many in the market say Wednesday’s Bank of England minutes did little to change the view among investors that UK rates will stay low into next year, which is seen as negative for sterling as other central banks begin to raise rates.

Elsewhere, the Nationwide also delivered a gloomy forecast for the UK economy, which you can read on the BBC here.

Summary
As the world exits recession, our governments policies mean that we are lagging behind in a big way, and there’s no sign of this changing in the near future. Rates are low, debt is high, unemployment is rising still, and all of this means that the UK is not an attractive place for investors. Other currencies such as the Euro and Dollar are more attractive, and this doesn’t bode well for those hoping exchange rates will rise.

Sorry for the gloomy outlook that seems to be mirroring our weather before the weekend, but that’s the state of play at the moment.

Todays Data
A quiet Friday. We’ve already had consumer price index for Germany. This was worse than expected, but GBPEUR rates still fell due to the reasons already outlined above.

Later we have a speech by the European Central Bank.

Whatever you’re doing over the weekend, have a good one!

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Inflation, BoE and effect on Pound exchange rates.

Good Morning. The pound fell from it’s recent highs yesterday after the Bank of England minutes showed a split in the decision to increase the Quantitative Easing measures. At 08:30am this morning, rates are as follows:

  • GBP/EUR 1.1210
  • GBP/USD 1.6675
  • GBP/AUD 1.8088
  • GBP/NZD 2.2716
  • GBP/CAD 1.7680
  • GBP/JPY 148.34
  • GBP/CHF 1.6956
  • GBP/ZAR 125162
  • EUR/USD 1.4868

Bank of England Minutes
The Bank of England’s Monetary Policy Committee (MPC) was split three ways in November over whether to increase its quantitative easing (QE) scheme – the first time members have voted in three different directions since the controversial policy began in March.

Spencer Dale, the Bank’s chief economist, in his first dissent from the majority since QE began in March, voted for no increase at all, arguing that pumping more money into the economy might fuel “unwarranted increases in some asset prices that could prove costly to rectify.”

In contrast, David Miles, who joined the MPC in June this year, called for QE to be increased by £40 billion in “order to provide greater insurance to the downside risks to growth and inflation”.
The split highlights a growing concern that the programme, where the Bank “prints money” and uses it to buy assets such as bonds, was stoking inflation.

What does this mean?
The door is clearly not shut on further quantitative easing. Nevertheless, with the economy almost certainly returning to growth in the fourth quarter, we suspect that November marked the final extension to the quantitative easing programme. The committee also discussed whether to cut the interest the central bank pays private banks for holding their cash deposits, in a bid to encourage them to lend the money rather than sitting on it, but decided that they did not want to do this at the present time.

So, inflation is rising, and this usually signals that interest rates will go up. If interest rates go up, Sterling becomes more attractive to investors, more people buy Sterling and the currency strengthens and exchange rates rise.

It’s not that simple however. Despite inflation rising, most analysts expect our interest rates to stay at record lows well into nex year. As mentioned above the BoE are actually considering cutting the rate for banks, and so the rise in inflation is unlikely to cause rates to rise as it usually would.

This is reflected in the drop in rates after the minutes were released yesterday.

Todays Data
For the UK, we have Retail Sales, Money Supply, and Public Sector Borrowing. The Retail Sales are the figures to watch. Expect a monthly rise of 0.6% and an annual rise of 2.9%. And different, and the pound will likely change in value.

We also have a speech by the European Central Bank President.He gives a press conference as to how the ECB observes the current European economy and the value of EUR.

His comments may determine a short-term positive or negative trend. If he shows a hawkish outlook, that is seen as positive (or bullish) for the EUR, while a dovish is seen as negative (or bearish).

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Pound vs US Dolllar

Good Morning. The pound rose yesterday after figures showed inflation in the UK rose. Rates @ 08:30am stand as follows:

  • GBP/EUR 1.1274
  • GBP/USD 1.6801
  • GBP/AUD 1.8046
  • GBP/NZD 2.2534
  • GBP/CAD 1.7681
  • GBP/ZAR 12.510
  • GBP/JPY 149.78
  • EUR/USD

UK Inflation
A key measure of UK inflation has risen for the first time since February, official figures have shown. The Consumer Prices Index (CPI) climbed to 1.5% in October, up from 1.1% in September. Meanwhile the Retail Prices Index (RPI) inflation measure, which includes mortgage interest payments and housing costs, rose to -0.8% from -1.4%.

Inflation accelerated mainly because fuel prices fell by a lot less than they did in the same period a year ago. Analysts had expected the rate of inflation to rise, so the figures came as no surprise to the City. “I don’t think this is anything that will worry the Monetary Policy Committee [of the Bank of England] too much,” said Amit Kara at UBS.

“The MPC has highlighted that inflation is going to be very volatile in the near term.” Given the serious risks facing the UK economy and the dangers of a double-dip recession in 2010, it is important for the MPC to persevere with an aggressive QE programme, and to consider special measures aimed at boosting bank lending to businesses,” said David Kern, chief economist at the British Chambers of Commerce.

So, with little chance of interest rate hikes, and more QE likely, we’ve seen yesterdays gains already pull back, as the pound is likely to remain weak well into 2010.

US Dollar
As global stockmarkets generally performed strongly, improving investor sentiment undermined some support for the US Dollar. However, the University of Michigan consumer confidence index, released on Friday, was weaker than expected and fell to the lowest level for three months, adding to US Dollar weakness late in the week.

This was balanced by earlier employment data showing that US jobless claims in the latest week fell to the lowest level since January, boosting some expectations that the US labour market could be stabilising.

Consumer price inflation data on Wednesday will be closely watched for signs that inflationary pressures are building (Inflationary pressure is when the price of goods and services in general increase at a higher rate than wages, thus causing a financial strain). A larger than expected rise could potentially offer support to the US Dollar on expectations that the Federal Reserve will eventually need to raise interest rates as the inflation risks intensify. However, global trends in investors’ risk appetite levels are likely to remain an important influence on the US Dollar’s overall performance.

The potential threat of Inflationary Pressure on both GBP and USD could force both the BoE and the Fed to take action sooner than expected. Taking advantage of the current gains made by GBP against USD should be considered as the potential to increase interest rates by the FED to counter inflationary effects would make USD a more attractive investment. On the flip side this would also affect those wishing to sell their Dollars as Dollar strength is undesirable.

Queens Speech Today
Written by the government and delivered by the reigning monarch, it sets out the legislative agenda for the year ahead and is the centrepiece of the state opening of Parliament. The government will promise a bill obliging it to halve its budget deficit within four years when it announces its planned new laws in the Queen’s Speech.

This will be interesting to see how they plan to do this, as the huge deficit the UK has is one of the reasons the pound is so weak. Analysts have no clue as to how the government plan to reduce this, so this may give clues as to the plan. Wooly comments will simply cause further Sterling weakness.

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Pound vs Euro

Good Morning. Rates @ 08:30am Tuesday 17th November are as follows:

  • GBP/EUR 1.1257
  • GBP/USD 1.6831
  • GBP/AUD 1.8081
  • GBP/NZD 2.2561
  • GBP/CAD 1.7679
  • GBP/CHF 1.6997
  • GBP/ZAR 12.446
  • GBP/JPY 149.46
  • EUR/USD 1.4948
GBP vs EUR
On Friday morning the Euro zone officially announced it had come out of recession with a growth in GDP of 0.4% just under expectation for a growth of 0.5%. The currency markets had priced in the figures and so we saw little movement in exchange rates between Sterling and Euro.

The German ZEW think-tank’s business survey showed that confidence levels in the Euro zone’s largest economy weakened in November, raising some concerns that the economy’s recovery could be more tentative in the coming months.
One of the reasons why the Euro zone has recovered quicker than the UK is because their financial sectors account for a smaller proportion of their economies. Stronger exports driven in Germany particularly by the car market has contributed hugely to the Euro zone’s recovery.

Only Spain and Ireland remain in recession. These announcements have potential to affect GBP/EUR exchange rates so if you are looking to purchase any of these currencies now maybe the time to contact your account executive to discuss the options available to you.

What you can do
With not much movement on the Market at the moment one may look into a Stop/Limit order, this gives you the option to look at prices which are not quite available on the market at present and also but putting a stop in this protects you against any reverse spikes against you.

For example if you are looking for a better price than is currently available one could put a limit order in to the market place at a price which is above or below interbank. However, on the flip side you may wish to protect your purchase from a market downturn and place a lower stop in case the market fluctuates the wrong way. (This is reversed if selling a currency)

This Week’s Data
This week is a much quieter week in terms of data releases, with nothing to note from the Eurozone aside from any un-announced press releases from European Central Bank officials which may occur.

In the UK, we have Bank of England minutes released on Wednesday. However, these are unlikely to reveal any big surprises, as Mervyn King outlined his view of the economy in last week’s quarterly inflation report. Looking to the USA, we have more data coming out, with Retail Sales, inflation and the leading indicators index as the week goes on.

Please find a full calendar below:

Monday
US – Retail Sales
UK – Rightmove House Prices

Tuesday
UK – CPI & RPI Inflation
US – October PPI Inflation

Wednesday
UK – Bank of England Minues
US – CPI & Real Earnings

Thursday
UK – M4 Money Supply
UK – Retail Sales

For more information on the information contained in this report, contact us today:

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EU GDP figures today. Outlook for GBP/EUR

Sterling hit a 1 week low against the dollar yesterday, staying weak after comments from the Bank of England earlier in the week. Also disappointing U.S. data propped up the safe haven US Dollar. The pound rose against the Euro however, coming off an earlier 2 week low, with traders citing selling of euros versus sterling by corporate accounts. Rates @ 08:30am are as follows:

  • GBP/EUR 1.1190
  • GBP/USD 1.6663
  • GBP/AUD 1.7942
  • GBP/NZD 2.2653
  • GBP/CAD 1.7512
  • GBP/ZAR 12.384
  • GBP/JPY 150.18
  • EUR/USD 1.4886

Analysts said sentiment towards the pound remained negative after comments on Wednesday by BoE chief Mervyn King that suggested the BoE was leaving the door open to more Quantitative Easing, and he highlighted the benefits of a weak currency (again!). Of course a weak pound is good for exports, but the fact is we are not a nation of exporters; we import much more, and so a weak pound is worse for most people.

“The market’s still reading Mervyn King’s comments to be on the dovish side,” said Paul Mackel, director of currency strategy at HSBC. “At the end of the day the Bank of England is still dovish, it is still expanding QE, and although sterling is undervalued versus the euro I can’t see it’s at the key turning point where it’s going to correct just yet.”

So, expect the pound to stay weak against the euro as monetary policy interest rates in the UK are seen staying at very low levels for much longer than rates in the euro zone, as they are expected to raise rates as the exit recession.

Euro zone GDP
Euro zone preliminary data due today is expected to show the Eurozone came out of recession in the third quarter. This would contrast sharply with the UK, where recent data showed GDP unexpectedly still contracting.

We have GDP data today for Germany, by far the largest economy in the Eurozone, as well as GDP for the whole EU. It is a measure of the total value of all goods and services produced by Germany & the EU. The GDP is considered as a broad measure of economic activity and health.

A high reading or a better than expected number has a positive effect on the EUR, while a falling trend is seen as negative.

The German data has already come in lower than expected, boosting the GBPEUR rate due to a weakening of the Euro. The EU figures are out at 10am, and is expected to be +0.5%. Any different, and expect volatility in pound to euro rates.

Other Data Today
Ger – Gross Domestic Product
Swi – Producer Prices
EU – Consumer Price Index
EU – Gross Domestic Product
US – Import Prices
US – Trade Balance
US – Consumer Sentiment

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