Currency Forecasts

Sterling remains under pressure

The pound remains under pressure this morning, and GBP/EUR has dropped into the 1.15’s. There was very little data yesterday, so the main reasons for the fall are likely to be the poor unemployment figures released on Wednesday:

Market Snapshot @ 08:30am

  • GBPEUR 1.1584
  • GBPUSD 1.6320
  • GBPAUD 2.0406
  • GBPNZD 2.5309
  • GBPZAR 13.268
  • GBPJPY 152.78

This week’s IMF report was also of importance, as they warned that the pound could be at risk from uncertainty and urged Prime Minister gordon Brown to set out a clear path for reducing national debt.

IMF
The International Monetary Fund has delivered its sharpest rebuke yet on the ‘dramatic deterioration’ in Britain’s public finances. In a major blow to Gordon Brown, the Washington-based fund warned the UK is ‘testing the limit of the market’s confidence’ by pushing the national debt towards 100 per cent of gross domestic product – or close to £1.5trillion.

If Britain does not do more to tackle public spending, faith in the Government’s ‘solvency’ could be damaged, it said in an economic health check. This means that for the short term at least, we expect the pound to continue to be pressured.

Health
The government has also warned that deaths from swine flu this winter could be between 19,000 and 65,000 in the UK. Experts said it was impossible to predict exactly, but with a third of the population perhaps becoming infected in the coming months the death toll could rise to such numbers. The World Health Organisation has also described the pandemic as the fastest-moving one ever, adding it was now pointless to count every case.

Even Cherie Blair has the virus, which I am sure is causing you as much concern and worry as it is me.

The figures have been critised as inducing panic amongst the general population, given that in ’99/’00 there were 21,000 flu deaths. Regardless, the fact that the NHS and government spending on this will increase pressure on the public purse, the net result can only be further weakness for the pound, as investors become risk averse.

Todays Data
EU – Construction Output
EU – Trade Balance
CAN – Consumer Price Index
US – Housing Starts
US – Building Permits

Site Maintenance
Now, many regular readers will be aware that from time to time, due to site maintenance, this blog goes through occasional periods where it is not updated.

Well, next week there will be site maintenance all week long, which I will be carefully monitoring from the sunshine island of Mallorca 🙂

On Monday, a weekly report for all of next week will be published here on our main site. Ensure you quote ‘Blog’ when you get in touch.

Of course, daily reports will continue from the 27th July onwards. Enjoy your weekend.

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Unemployment & Exchange Rates

The main events yesterday were the UK unemployment figures, which we will look at today. First let’s have a quick look at where rates stand right now:

Market Snapshot @ 08:30am:

  • GBPEUR 1.1625
  • GBPUSD 1.6385
  • GBPNZD 2.5557
  • GBPAUD 2.0509
  • GBPCAD 1.8320
  • GBPCHF 1.7626
  • GBPZAR 13.327
Yesterdays Trading
First at 09:30am yesterday, we saw the number of people claiming unemployment benefit increased by 23,800 in June to 1.56 million, which was actually less than analysts had forecast.

As the figures were better than expected, we saw a slight surge in the pound, pushing GBP/EUR up to around 1.1685.

The rise was short lived however, when the Office for National Statistics released further data that showed UK unemployment rose by a record 281,000 to 2.38 million in the three months to May. This means that the jobless rate has now increased to 7.6%, the highest in more than 10 years.

TUC general secretary Brendan Barber said “It’s particularly worrying that over half a million unemployed people have been out of work for at least a year, including 133,000 young unemployed people.”
With a new generation of school and college leavers soon starting to look for work, our unemployment crisis will no doubt get even bigger, with most analysts forecasting the level will break well over the 3 million mark.

Even though economic conditions may be stabilising, economists expect unemployment to continue rising this year, as financial uncertainty persists.

Very Strange Figures
The claimant count measure of unemployment in June posted its smallest rise in a year.

However, the wider ILO measure posted its biggest rise on record. Of the different figures released, it is the internationally recognised ILO figure of 2.38 million that is the government’s preferred measure for unemployment, because it is a more comprehensive indicator of the job market.

So, in the same day we had figures showing the smallest rise in a year, while at the same time figures showed the biggest rise on record ?!

The Chartered Institute of Personnel and Development has called for an enquiry into this conundrum of the differing figures. Either way, the markets have taken the news negatively for the pound, and Sterling continues to struggle against major currencies including the EUR and USD. With a lack of any economic data today, it’s confidence that will be the driver for exchange rates today.

So, what next for the pound?
We still think that rates in the medium to long term will continue to rise and GBPEUR will break well through 1.20 later this year. In the short term however, we could well see problems for the pound as poor figures dent confidence that the worst of the recession is over.

If you have a currency requirement, then it’s times like this the tools we have available can protect you from falling rates. Leaving it to chance and simply hoping the market will move in your favour is simply gambling. Most clients use our service to transfer large sums for things like property purchases abroad.

If you are happy to simply gamble with large sums like this, then that’s great. For those of you more risk averse that would rather not risk losing a large amount of money on the fickle currency markets, open a free trading facility with us, and take advantage of our free consultation service so you can explore all the options available to you.

Todays Data
We have nothing at all for the EU or UK today, with most data coming from the US:

US – Jobless Claims
US – Philly Fed Survey
Swiss – ZEW Survey

We also have total net TIC flows from the US. TIC stands for Treasury International Capital. It shows in and out flows of financial resources in the United States. The TIC flows is one of the major events in the market, as it is seen by most participants as the Government resource for offsetting the current Trade Deficit.

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Pound Remains under Pressure

Yesterdays Trading
Sterling extended gains against the euro yesterday in early trading, hitting the day’s high after Bank of England policymaker Adam Posen said he expected the UK currency to trade higher against the euro in the medium term. His comments caused some short term strength for the pound.

Sterling however trimmed gains against most currencies alter in the day, including the Euro and the US Dollar after data showed that annual UK consumer price inflation fell below the Bank of England’s 2 percent target, suggesting that price risks continue to recede as the economy remains weak.

The Office for National Statistics said UK consumer prices rose 0.3 percent on the month in June, taking the annual rate to 1.8 percent, the lowest since September 2007, from 2.2 percent in May.

Today we have several data releases for the UK at 09:30am; Claimant Count, Average Earnings, Unemployment Rate & Jobless Claims. The unemployment rate will have the most impact, and we expect th figure to be 7.4%. Any more than this, expect the pound to weaken. Any less than this, and rates may climb slightly.

UK Jobs
On the subject of unemployment, a BBC survey yesterday showed that 2 thirds of people across the UK know someone personally who has lost a job in the recession.

But, while concerns about employment may be increasing, most people believe the worst may be over – despite believing the economic situation remains tough.

It is this confidence that caused the recent upsurge in Sterlings value, although official figures paint a different picture, which is why the pound remains where it is. Watch today’s data closely for any difference in the actual figures compared to estimates.

Eurozone
Figures yesterday showed that Eurozone industrial output rose in May compared with April, the first month-on-month increase since August last year. This caused some further strength in the Euro, and helped to knock rates down yesterday afternoon.

Factory production across the 16 nations that share the single currency rose 0.5% last month from April, but was still down 17% from May last year.

The data comes two weeks after official figures showed eurozone retail sales fell in May, while unemployment rose.

“May’s first rise in industrial production is obviously very welcome news, and reinforces belief that the eurozone economy contracted at a substantially reduced rate,” said Howard Archer, chief economist at IHS Global Insight. “Nevertheless, it needs to be put into perspective – production was still down by 17% year-on-year.”

As a result, Mr Archer said it was “premature at this stage” to say that industrial output would make a sustained recovery. So, as earlier in the year we have a tug of war between how badly the EU and UK economies are performing, and it is this back and forth thats causing the rate to bounce up and down. It’s impossible to predict who will win this tug in the short to medium term, and the most important thing to keep an eye on is official data releases. The markets are as unsure as the rest of us, and so any differential in actual figures is causing big swings in exchange rates.

At 10am this morning we have Consumer Price Index for the EU. This captures the changes in the price of goods and services. The CPI is a significant way to measure changes in purchasing trends and inflation in the Euro Zone, so watch these figures closely.

Todays Data
UK – Claimant Count
UK – Average Earnings
UK – Unemployment Rate
UK – Jobless Claims
EU – Consumer Price Index
US – Consumer Price Index
US – FOMC Minutes
US – Crude Oil Stocks

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Outlook for Sterling Exchange Rates

EUR
As against most other major currencies, Sterling weakened against the Euro in the early stages of last week, with the GBP/EUR rate trading at a low of 1.1528 on Wednesday.

Positive sentiment towards the Eurozone economy and Euro were boosted by better than expected data from its largest economy; German manufacturing output rose by the most in almost two years in May, whilst industrial production also increased at its fastest pace in nearly sixteen years.

In an absence of any further Eurozone economic data, there was little in the way of Euro momentum over the remainder of the week to direct the GBP/EUR rate. Renewed concerns over the health of the Eastern European economies coincided with Sterling strength, as the Bank of England (BoE) left interest rates unchanged at 0.5% and decided not to expand its £125 billion quantitative easing (QE) stimulus programme, enabling the Pound to move above the €1.17 level early on Friday.

However Sterling was unable to hold on to these gains after comments from the Chancellor, Alistair Darling, that the recession was proving to be longer lasting than anticipated.

The GBP/EUR rate closed on Friday 0.6% down at 1.163 from 1.17 a week earlier, benefiting those converting Euros into Sterling.

This week’s calendar will offer further evidence of the UK economy’s current trajectory, with retail sales data, house price data and consumer price inflation data on Tuesday. Further doubts over the UK’s recovery prospects could be highlighted by a 16th consecutive monthly drop in employment on Wednesday, if the figure increases more than expected.

On the other hand, the German ZEW think-tank’s economic sentiment survey and industrial production data, both due on Tuesday, could undermine the Euro if they are worse than anticipated and dampen Eurozone recovery hopes. The latest consumer inflation data will also be closely watched on Wednesday.

Contact us to ensure you make the most of the currency markets and understand how these data releases will affect your purchase.

USD
The USD spent most of last week trading in a narrow range around the low 1.60’s, falling for the second successive week but at least, seemingly, reaching a support level at 1.60. The future outlook on the Dollar will again depend hugely on global economic conditions, as the world optimistically awaits the ‘green shoots of recovery’.

The most notable economic release from the U.S this week will be the minutes of the Federal Reserve’s most recent interest rate policy meeting. Investors and those with an upcoming USD requirement of any kind will be paying close attention for the Fed’s opinion on the financial markets and growth, as this will undoubtedly have some impact on the direction of GBP/USD cross later in the week.

Focus will also be on Retail Sales data (Tuesday), industrial production data (Wednesday), manufacturing data (Thursday) and housing data (Friday). Any positive releases could be seen as a sign of a U.S recovery and potentially provide strength for the struggling dollar.

However, as regular readers will be aware markets are rarely straightforward and the USD is certainly no exception. Throughout the financial crisis the USD has been widely perceived as a ‘safe-haven’ currency, and with risky assets being collectively avoided by mainstream investors, the Dollar has benefited hugely.

The result of this could be that as the U.S economy recovers, there is actually an indirect correlation with the strength of the USD. While this is highly unusual, it is certainly possible as any signs of recovery in the U.S could lead to global investors unwinding safer investments and taking those funds elsewhere to fund investment in more risky (potentially more profitable) schemes.

All this conflicting information makes it extremely difficult for analysts to predict the direction of cable in the short-term and increases the need for anyone buying US Dollars to stay in regular contact with their account manager and pay close attention to all relevant economic data releases.

This Weeks Data
The main data to look out for this week is the ZEW Survey which measures the institutional investor sentiment, reflecting the difference between the share of investors that are optimistic and the share of analysts that are pessimistic.

Also the US Retail sales the retail Sales measures the total receipts of retail stores. Monthly percent changes reflect the rate of changes of such sales. Changes in Retail Sales are widely followed as an indicator of consumer spending. Last readings were below expectations and we saw Sterling strength against the Greenback.

And on Wednesday we see the BOJ (Bank of Japan) interest decision. As each data may carry a spike in the right or the wrong way, with this in mind you may want to look into the number of ways that FCG can try save you money on your transfer.

With the Pound taking a hit against the Euro today this gives an unexpected window of opportunity is certainly a time when those of you needing to make significant currency purchases at any point during 2009 should consider the benefits of locking into a forward contract. This contract type allows you to lock into exchange rates for anything up to two years ahead with only a small deposit required.

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Pound gains against USD & EUR

Sterling Gains
Yesterday we saw the pound make significant gainst against both the single currency and the US Dollar. We’ll take a look now at what caused the rise, and where rates may head in the coming months.

The pound jumped against the dollar and euro yesterday after the Bank of England left its quantitative easing target unchanged, surprising markets which had expected the central bank to expand its asset buying scheme.

I and many others thought that they would raise the total funds to pump into the economy by 25 billion pounds, which would have allowed the central bank to pump money into the economy until August when it publishes new quarterly economic forecasts.

However, there was no expansion of the programme of ‘printing’ new money to boost the economy. The markets move as much on rumour as fact, and because further money was expected to be created, this is what has weakened the pound this week. When it was clear there would be no expansion, we immediatley saw Sterling gain strength. At the time of writing, rates are as follows:

  • GBPEUR 1.1690
  • GBPUSD 1.6270
  • GBPNZD 2.5905
  • GBPAUD 2.0885
  • GBPCAD 1.8914
  • GBPCHF 1.7696

However, you have to bear in mind that they haven’t ruled out further QE altogether. The BoE said it would review the programme in August, when it releases its quarterly Inflation Report. So, the pound has some room to improve, however in a few weeks when we see the minutes of yesterdays meeting, if there were discussions of raising the figure, then the current strength of the pound could well be short lived.

The MPC has sent a clear signal however that the endgame for QE has arrived. The Bank has not completely closed the door to further gilt or private credit purchases, but it seems unlikely that there will be a significant increase in asset purchases beyond August.

Dismal economic data earlier this week has weighed on the pound as the figures reinforced views Britain’s economy has yet to show any clear signs of recovery. Industrial output posted an unexpected fall in May while house prices also declined, albeit at a slower pace.

Summary
So, if you have a requirement to purchase EUR or USD with Sterling, then you may wish to take advantage of the rates that are much better than of late, and very close to the best rates we have seen all year. The economy is still some way off from recovery, and so this spike could well be short lived. Get in touch today to discuss your requirements, and we can help you fix your rate now, even if you dont need the funds for up to 2 years with a Forward Contract.

Todays Data
Germany – Wholesale Price Index
UK – Producer Price Index
US – Import Price Index
US – Trade Balance
US – Consumer Sentiment

Enjoy your weekend!

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