Currency Forecasts

Pound makes big gains against USD & EUR

Sterling racked up its biggest 1 day gain against a basket of currencies including the Euro and US Dollar in nearly a year yesterday, after a UK policymaker’s comments prompted speculation the Bank of England may not extend quantitative easing. Rates at 08:30am stand as follows:

  • GBP/EUR 1.0921
  • GBP/USD 1.6290
  • GBP/AUD 1.7658
  • GBP/NZD 2.1883
  • GBP/CHF 1.6558
  • GBP/CAD 1.6817
  • GBP/ZAR 11.904
  • GBP/JPY 148.03

Bank of England & Quantitative Easing
The reason the pound has been so weak recently, is due to the fact our interest rates are so low, and likely to remain so for a long while. Also, the QE measures were predicted to be extended, which has kept the pound low.

Monetary Policy Committee member Paul Fisher yesterday told the Financial Times the BoE’s interest rate cuts and injection of money into the economy via asset purchases were working, and it’s this positive view that caused yesterdays rally, even though there was little UK data out yesterday.

Sterling has come under heavy pressure in recent weeks, battered across the board on the view that UK interest rates will stay low and public finances will deteriorate further. The pound rose more than 2 percent at one stage against the dollar and the euro and more than 3 percent versus the yen, taking it to its highest in three weeks against the U.S. and Japanese currencies and to a 10-day high versus the euro.

“Fisher was implying that he thinks quantitative easing is working fairly well, which has led to talk that the policy may be withdrawn sooner than previously thought,” said Neil Mellor, currency strategist at Bank of New York Mellon.

The market is eagerly awaiting the November MPC meeting to see if the BoE extend quantititive easing. If they do not then we are likely to see a rally in sterling,” said Geraldine Concagh, economist at AIB Group Treasury in Dublin.

Mellor at the Bank of New York Mellon said, however, that the comments had done little to alter the negative picture on the UK currency. “Sterling’s plight is more about interest rates being on a floor and staying there, because the BoE is in no position to start thinking about raising rates at all,” he said. “This could be the perfect selling opportunity,” he added.

So, is this a sign of recovery for the pound, or simply a short term spike that will correct itself in the coming weeks? Impossible to tell. Markets will look to Novembers BoE meeting to see if more QE is announced. If this becomes more likely, expect the pound to fall. If it is less likely, then my view is Sterling cant simply climb and climb, as the fact remains that we are still in recession, and our rates are going to remain low for some time.

Again today, there is little economic data of note. There is however various measures from the USA, and it is this that has helped boost the pound. When there is good US data, in the past this would have strengthened the USD and made no difference to Sterling. In the current climate however, and good news from the states is a sign of global economic recovery, and so this boosts risk sentiment and thus drives investment towards riskier currencies such as the pound.

We saw this yesterday, as better than expected US data helped the pounds run yesterday. Stock markets were also up across the board, and you can read a breakdown of the gains in this BBC article.

Have a great weekend.

Todays Data
EU – Trade Balance
Can – Consumer Price Index
US – Industrial Production
US – Consumer Sentiment

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Pound makes gains on unemployment data

Sterling rose slightly on Wednesday, up sharply for most of the day on stronger than expected UK jobs data, before losing ground on a Financial Times report on the Bank of England’s quantitative easing programme. Rates this morning stand as follows:

GBP/EUR 1.0785
GBP/USD 1.6113
GBP/AUD 1.7490
GBP/NZD 2.1550
GBP/ZAR 11.637
GBP/JPY 144.12
GBP/CHF 1.6318

UK Unemployment
Official statistics showed the unemployment rate held steady at 7.9 percent in August. Economists had expected a rise to 8 percent. Because the rise was less than forecast, the pound rose. The number of Britons claiming jobless benefit rose by 20,800 in September, less than expected and the smallest rise since May 2008.

This was enough to trigger a relief recovery but the market is still broadly bearish on sterling because of Britain’s deteriorating fiscal position and the likelihood of interest rates staying low for a long period.

“The fact that sterling is stronger is evidence of positioning rather than the strength of the data, because in reality the data weren’t all that much stronger than expected,” said Paul Robson, currency strategist at RBS Global Banking in London.

Expectations rates will stay at record lows of 0.5 percent and that the BoE may extend its QE programme have pummelled the pound in recent months and are making traders pessimistic about its outlook.

The latest unemployment data comes a week before the Office for National Statistics (ONS) releases its first estimate for how the UK economy performed between July and September.

Despite some signs of economic improvement, analysts remain unsure as to whether the economy will post growth and therefore exit recession. If the economy contracts again, it will be the first time that the UK has endured six successive quarters without economic expansion.

Todays Data
There is no data of note for the UK today, with most data coming from the EU and USA. We also have some inflation data from Australia. Look out for the ECB monthly report which is a detailed analysis of the prevailing economic situation and the risks to price stability. It also provides articles on a wide range of topics related to the tasks of the ECB.

EU – ECB Monthly Report
EU – Consumer Price Index
US – Consumer Price Index
US – Jobless Claims

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Pound falls again after poor economic forecasts

Good Morning. The pound fell yet again yesterday, after reports from both the Centre for Economics and Business Research & the British Chambers of Commerce cast doubt on the pace of UK economic recovery. Rates @ 08:30am stand as follows:

  • GBP/EUR 1.0673
  • GBP/USD 1.5766
  • GBP/AUD 1.7412
  • GBP/NZD 2.1395
  • GBP/CAD 1.6332
  • GBP/JPY 141.93
  • GBP/CHF 1.6191
  • GBP/ZAR 11.588

Why has the pound fallen again?
As mentioned above, it’s the two reports that cast doubt on the UK economy. As this is the main news of the week so far, we’ll look at each report in detail.

Centre for Economics and Business Research
UK interest rates will stay low for years amid tax rises and spending cuts, according to an economic forecast by the CEBR. They believe the rate will remain at its current 0.5% level until 2011 and not reach 2% until 2014.

The report also predicted Sterling will weaken further, falling to $1.40 against the USD and “possibly” below 1 euro to the pound. Its forecast is based on the government managing to slash the UK budget deficit by £100bn over the next parliament, which is a big ask. It says that about £80bn of this would come from spending cuts, and a further £20bn from tax rises.

The reason this weakened the pound, is that with our interest rates low, while other zones increase their rate, investors will get more return from other currencies. This drives investment away from Sterling, causes weakness in the currency and the net result being lower exchange rates.

The British Chambers of Commerce
They have said that business confidence was improving but the economy was still “frail”.
Official GDP figures are due next week, and if they show no growth, it will be the first time the UK has endured six successive quarters without growth. Last week, the National Institute of Economic and Social Research also estimated that the economy did not grow in the June to September quarter. This compounded Sterlings problems, and rates dropped as a result.

Todays Data
Last night we had the RICS house price data which shows the strength of the UK housing market. The figure was +22% against a forecast of +15%. The figures were much better than expected, but due to the overall negative sentiment towards Sterling, it made little to no impact on exchange rates, with this mornings rates actually slightly below yesterdays closing prices.

Today, we have consumer price index, retail sales, and housing data for the UK:
Aus – NAB Business Confidence
UK – Consumer Price Index
UK – Retail Price Index
UK – DCLG House Price Index
US – Consumer Confidence

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Pound continues to fall. Weekly currency outlook.

Good Morning. The pound had a torrid run last week, with rates steadily falling. Sterling fell further this morninig, hitting its lowest level in almost five months against the dollar on the view that UK interest rates will remain low and that the outlook for the British public finances remains bleak. Rates @ 08:30am are as follows:

  • GBP/EUR 1.0719
  • GBP/USD 1.5749
  • GBP/AUD 1.7508
  • GBP/NZD 2.1652
  • GBP/CAD 1.6426
  • GBP/JPY 142.30
  • GBP/ZAR 11.730

Pound falls further
Sterling fell on Friday, hurt by a broadly firmer dollar after comments by U.S. Federal Reserve Chairman Ben Bernanke seen by market players as hawkish.

Those with Euros to sell have benefited by a week long run of poor UK data, bringing rates to the best they have been for around 5 to 6 months:

As you can see from the chart, rates have continued their downward trend after poor UK data outweighed the positive news.

Data on Friday showing UK output prices surprisingly turned positive and a slight narrowing in the trade deficit also failed to turn around the pound. Sterling was a big loser against the dollar because of expectations Britain will be among the last major countries to withdraw its extremely easy monetary policy due to its poor economic performance.

“Sterling remains most vulnerable against the dollar’s rise in the recent turn in global sentiment” spurred by the market’s reaction to Bernanke’s comments, said Ian Stannard, currency strategist at BNP Paribas.

Sterling had actually risen on Thursday after the BoE maintained its 175 billion pound asset buying programme and kept interest rates at a record low of 0.5 percent, as expected.

The focus is on the November meeting when the central bank will have new economic forecasts. Most analysts do not expect any change in policy although a sizeable minority still see a further expansion of the quantitative easing programme.

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This Weeks Data
With the pound very weak, data releases will have a big impact on Sterling’s movements. With Sterling under lots of pressure, and negative economic figures will keep exchange rates low. Any positive releases that may signal that the UK is recovering from recession, and we could see rates recover.

Today is fairly quiet, as it’s a US Bank holiday, but there is some house price data for the UK, along with retail sales. Wednesday is the most important for UK data, when the unemployment and jobless data for the UK will be released.

For the EU we have industrial production, Consumer Price Index, and we’ll also look to thursdays ECB monthly report that contains a detailed analysis of the prevailing economic situation and the risks to price stability. It also provides articles on a wide range of topics related to the tasks of the ECB.

For the US we have the FOMC minutes on Wednesday which determines the appropriate stance of monetary policy and assesses the risks to its long-run goals of price stability and sustainable economic growth. On the same day we will see retail sales and import prices. Also look to jobless data for the US on Thursday.

Elsewhere, there is an interest rate decision for Japan, and for Australia there is a speech by the governor where he gives a press conference as to how the RBA observes the current Australian economy and the value of AUD. His comments may determine a short-term positive or negative trend.

Monday
Ger – Wholesale Price Index
NZ – Retail Sales
UK – RICS House Prices
UK – BRC Retail Sales

Tuesday
Aus – NAB Business Confidence
UK – Consumer Price Index
UK – Retail Price Index
UK – DCLG House Price Index
US – Consumer Confidence

Wednesday
Jap – Interest Rate Decision
UK – Average Earnings
UK – Unemployment & Jobless Claims
UK – Retail Price Index
EU – Industrial Production
US – Import Prices
US – Retail Sales
US – FOMC Minutes
NZ – Consumer Price Index
Aus – RBA Speech

Thursday
EU – ECB Monthly Report
EU – Consumer Price Index
US – Consumer Price Index
US – Jobless Claims

Friday
EU – Trade Balance
Can – Consumer Price Index
US – Industrial Production

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Exchange rates after BoE decision.

Good Morning. The pound remained fairly steady yesterday after the news from the UK and EU central banks that interest rates will be left on hold at 0.5% and 1.0% respectively. At 08:30am rates stand as follows:

  • GBP/EUR 1.0860
  • GBP/USD 1.5999
  • GBP/AUD 1.7686
  • GBP/NZD 2.1638
  • GBP/CAD 1.6834
  • GBP/CHF 1.6490
  • GBP/JPY 142.91
  • GBP/ZAR 11.775

Bank of England & Quantitative Easing
It was expected that rates would be left on hold, and the main news again was Quantitative Easing. A phrase that this time last year meant nothing to most people, but that has now become one that we have been using lots over this year!

BoE rate setters held back from providing further aid for the British economy yesterday despite concerns over the fragility of the UK’s pull out of recession. The Bank of England voted to hold interest rates at their 0.5 per cent record low and continue with its £175 billion programme to boost the money supply at its latest two-day meeting. You can read their press release here.

The Monetary Policy Committee (MPC) faced calls this week to increase the scale of its quantitative easing efforts to at least £200 billion after worse than expected manufacturing figures. But yesterdays decision was in line with the views of most economists, who expect the MPC to look again at the impact of the policy next month with the help of the Bank’s latest inflation forecasts.

The MPC is weighing up mixed signals on the economy, with rising house prices and stock markets set against a surprise 1.9 per cent fall in manufacturing output during August after two months of growth. It added that it would take about one more month to buy the full planned amount and warned it would keep the scale of the programme under review, keeping the door open for further quantitative easing measures in the future.

Analysts said that while sterling had been supported by rates staying low, the view that weakness in the economy might require more stimulus from the BoE had hindered further gains. I expected rates to climb after the announcment, however it is the view that more stimulus will still be needed that is keeping pound rates low.

Although the wider economy is expected to return to growth towards the end of this year after five quarters of recession, the Bank’s preferred measure of money supply showed sluggish growth during August – casting doubt on whether the QE policy was working.

Which way will the pound go in the next month?
The pound has taken a beating in recent weeks as markets have read comments by BoE Governor Mervyn King that a weak currency may benefit the UK economy as a cue to dump sterling. This is what has brought rates down from €1.16 several weeks ago, to the level today just below €1.09. However, I was surprised that the BoE did not mention currencies at all in their statement yesterday.

With few fireworks resulting from Thursday’s meeting, focus turns to the BoE’s November gathering, at which the bank will have new economic forecasts on which to base its policy outlook. Analysts are divided on whether another increase in the asset purchase programme will be announced next month, but many say more signs of economic weakness will increase the chances of more quantitative easing.

We’ll have to see how economic figures look for the remainder of the month. Negative figures will keep the pound weak, and increase the chance of more QE next month. Positive figures will strengthen the pound, and cause rates to climb back to the €1.15 level. The markets do expect more QE next month, and so this is probably already priced into the market for the most part.

It’s the fact the the data we’re getting is mixed that is making movements impossible to forecast. Good house price and Retail information on the one hand, but poor manufacturing and industrial production on the other.

Rates will likely stay steady for the coming weeks, with negative data keeping rates where they are and positive news causing a rise. I think at the bottom end, the lowest we’ll see is maybe a point or two below where we are today. There is more risk to the upside however, with any good figures risking causing rates to recover back to €1.14 / €1.15.

Todays data
We have Trade Balance data for Germany, the US and the UK. This is a balance between exports and imports of total goods and services. A positive value shows trade surplus, while a negative value shows trade deficit. It is an event that generates some volatility for the currency markets.

We also have Producer Price Index for the UK, and for the EU we have a speech by the ECB chairmain Trichet. In the US this afternoon, there is a speech by the Federal Reserve. For more information on how these releases may affect exchange rates, please contact us today.

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