Currency Forecasts

Sterling Exchange rates recover

Sterling has climbed and recovered some of its losses following the political uncertainty at the end of last week. At the time of writing, rates are as follows:

GBP/EUR 1.1592
GBP/USD 1.6164
GBP/AUD 2.0370
GBP/NZD 2.5936
GBP/JPY 158.60

The main reason for the gains are two fold. Firstly the cabinet re-shuffle seems to have settled the ship in government, at least for the time being. The chances of a general election this year are very slim, and so the renewed stability has renewed investors confidence in the pound. There was relief too that the political troubles facing Prime Minister Gordon Brown appear to have calmed for now, with Labour Party members offering their support to his leadership on Yesterday.

Secondly, and more importantly there is renewed confidence in the UK housing market, which has really boosted the pound this morning.

UK Housing Market
A survey by the Royal Institution of Chartered Surveyors showed house prices in England and Wales falling at their slowest annual pace in November 2007. The RICS survey, which has been running since 1978, takes a snapshot of the degree of confidence in the market from surveyors and estate agents across the UK.

“On the face of it, the housing market does appear to be close to bottoming out with activity picking up in a material way and prices at last stabilising,” said Rics spokesman Ian Perry.

On 4 June, a survey by the Halifax said that UK house prices rose by 2.6% in May compared with April but activity remained low in the market. This came shortly after the Nationwide building society reported a 1.2% rise in prices in May compared with April – the second rise in three months. Further housing data today may support this, so for Euro buyers it’s good to see that the slump in recent days looks to be short lived. Euro sellers however, should take note that analysts believe the Global recession is easing, which could cause rates to continue moving the wrong way.

Global Recession.
The pace of decline of the world’s major economies is slowing, according to the Organisation for Economic Co-operation and Development (OECD). The global economy is poised for its worst year since World War II as the major economies have fallen into severe recession.

The organisation said countries not included in the OECD were still declining at a fast pace, with the exception of China and India. Both those countries showed similar signs of easing to the US and Europe.

The data points to a “reduced pace of deterioration in most of the OECD economies with stronger signals of a possible trough in Canada, France, Italy and the United Kingdom”, the OECD said.

World stock markets and Sterling have recovered from their lows in March on hopes for a global recovery, based mainly on survey data of consumer and business confidence. So, the recession is still here, and it just seems that the slowdown has eased. This doesnt mean of course that everything is suddenly rosy, it just boosts investor confidence, which for the time being is helping the pound. Of course, any negative data in these turbulent times could cause rates to drop away again as quickly as they have recovered.

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Todays Data
We have already had Trade Balance data for Germany as mentioned in yesterdays report. This was as expected, and so has not had much effect on rates. Also from Germnay, the largest economy in the EU, we have Industrial Production data at 11am. Changes in industrial production are widely followed as a major indicator of strength in the manufacturing sector. If the result is higher than expected, then GBP/EUR rates may fall. If lower, then we may see rates continuye to climb.

For the UK today, all we have is DCLG house price data, which may support the positive data from yesterday. Other than this, it is continued political developments that’s likely to effect Sterlings value.

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Pound falls on Political uncertainty

Last Weeks trading
After some weeks of continued strength for the pound, this all came to an end last week as rates dropped away again. On Wednesday last week, rates had hit 6 and 7 month highs against the Euro and US Dollar respectively. The main reason for the sudden decline Thursday and Friday was continues political uncertainty in the UK.

We had many cabinet ministers resign, following by rumours that Gordon Brown was going to resign, rumours which were quickly rubbished by number 10. Poor showings for the government in both the local and European elections have also put pressure on the pound.

The uncertain political situation encouraged investors to sell the pound, particularly as they were unsure how long it would hold on to gains of nearly 10 percent it racked up against the dollar last month — its biggest monthly gain since 1985. This sell off of Sterling is what caused the value to slide.

“The pound is suffering broad weakness due to political uncertainty,” said Neil Jones, head of European hedge fund sales at Mizuho Corporate Bank in London. “It’s not good to have no government structure,” he said, adding that political uncertainty was shifting focus away from efforts to ensure economic stability.

Sterling had been riding high in recent weeks on hopes that the worst was over for the UK economy. Some analysts said the impact on sterling from the UK’s political woes was likely to be short-lived though, so we could see a recovery this week.

“The limited scope for plausible economic policy shifts in the UK will remain unchanged irrespective of whose hands are grasping the levers of power,” said Neil Mellor, a currency strategist at Bank of New York Mellon. “The burgeoning fiscal deficit in the UK is a problem that crosses party lines and one that would invite political disaster should it be tackled prematurely,” he added.

The pound has fallen against the dollar this morning after poor European Election results, but us still close to 1.14 against the Euro after falling into the 1.12’s at the end of last week. Elsewhere, there were reminders that the UK economy is far from out of the woods yet. Data showed UK construction output tumbled by 9 percent in the first quarter, which the statistics office said will knock 0.3 percentage points off UK gross domestic product.

So, all eyes this week will continue to be focused on Political Events, and also the raft of UK economic data that will give clues as to how the UK economy is faring in the recession.

This Weeks Data
Lots of data from the EU, US and UK this week. The most significant data is listed below, but the main events to watch for are:

Germany – The largest ecomomy in the EU, figures from Germany can have a big impact on the value of the Euro and so affect GBPEUR exchange rates. Today we have Factory orders, and tomorrow Industrial Production. A good indicator of how these sectors are performing.

UK – House Price Data today, wednesday sees Trade Balance, Industrial and Manufacturing Production. This will likely affect Sterlings value, and of course ongoing political events will also continue to have an impact

New Zealand – Interest Rate decision on Wednesday, following by Retail Sales data Thursday.

EU – ECB Monthly report on Thursday, and also a speech by ECB president Trichet on Friday. Watch any comments carefully as surprise announcements could strengthen or weaken the Euro.

Monday
Ger – Factory Orders
UK – RICS House Prices
UK – BRC Retail Sales

Tuesday
UK – DCLG House Prices
Ger – Industrial Production

Wednesday
UK – Trade Balance
UK – Industrial Production
UK – Manufacturing Production
US – Mortgage Applications
US – Trade Balance
NZ – Interest Rate Decision

Thursday
AUS – Employment & Unemployment
EU – ECB Monthly Report
US – Retail Sales
US – Jobless Claims
NZ – Retail Sales

Friday
G8 Meeting
EU – Industrial Production
EU – Trichet Speech
US – Import Prices
EU – Trichet Speech

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GBP falls suddenly

Pound Plummets
Earlier this week, the GBPEUR rate hit a 6 month high of 1.1650, based on renewed confidence in Sterling, and also US Dollar weakness causing further buying of the pound, which pushed the currency higher. This has proved to be very short lived however, as the pound plummeted dramatically in trading early yesterday afternoon. First we’ll take a look at the main economic data yesterday, the interest rate announcements. Then we’ll take a look at why the pound has fallen so much.

BoE and ECB rate decision.
As expected by analysts, both the UK and EU left their interest rates on hold at 0.5% and 1.0% respectively. I did go out on a limb and predict the EU may cut, however they did indeed left rates unchanged for the time being. We now look for an EU cut next month.

As discussed yesterday, the main focus was not on the actual rate movements, but rather whether either zone would extend their quantitative easing programmes, and create new money to pump into the economy. This didn’t happen, and so for a while after the decisions, there was no movement at all in exchange rates. Analysts now expect the BoE to increase the QE measures next month, which will likely weigh on the pound.

So, why did GBP drop so quickly and so suddenly?
Simple answer is the political situation in the UK. Soon after the interest rate decisions, focus shifted to politics as the pound fell sharply on speculation British Prime Minister Gordon Brown would resign, which was quickly dismissed by his office as “absolute nonsense.”

Markets seized on the speculation and it was this that took the pound lower, cashing in on the pound’s lofty levels as broad-based dollar selling lost momentum.

Politics and the expenses scandal has been all over the front pages for a month now, but up until yesterday this has had little effect on the markets. now however, with yet another minister (Purnell) resinging from the cabinet, it would appear the goeverment is in meltdown. Early polls suggest Labour have been demolished in the local elections, with the conservatives now way ahead. It is more likely than ever now that Brown will have to step aside, and a General Election is getting more likely by the day.

“The market is waking up to what a mess politics are in the UK and that is causing sterling to underperform,” RBC currency strategist Adam Cole said.

“Earlier in the week the uncertain political situation in the UK had no effect on the pound, but now people are talking about it as a sterling negative,” said Brown Brothers Harriman currency strategist Audrey Childe-Freeman.

GBPEUR at the time of writing is back in the 1.12’s, with USD rates just above $1.60. As I often say in this blog, spikes are often short lived, and that yet again has proved to be the case.

When should I buy my currency?
There are really 2 times that are the best times to fix your rate. The absolute best time, is when the rate is at its peak. Of course, achieving this is purely luck, as nobody knows where that peak is until it has already passed.

So, the second best time to buy your currency, is just after a peak. This is where we were yesterday, and clients that had an account open, were able to take advantage of this strategy
and protect themselves. Make sure you have a live account, so you can act quickly should you need to. Click the orange banner below to register for free.

Todays Data
As you will see below, there is further data today, and of course political developments over the weekend are also likely to weigh heavy on Sterling.

UK
we have Produce Price Index data at 09:30, which is a monthly measurement of the rate of inflation experienced by the UK manufactures when buying goods and services. It captures changes in the average price of a fixed basket of goods and services purchased by the UK Manufactures. It often causes changes in the pounds value.

US
Today is mostly US based data. As I outlined earlier in the week though, changes in value of the US Dollar can have a direct effect on Sterlings value, so needs to be taken in to account.

At 13:30 we have earnings and unemployment data. Most important though, is the Non-Farm Payrolls which is one of the most important data releases. The report presents the number of people on the payrolls of all non-agricultural businesses.

The monthly changes in payrolls can be excessively volatile. As its so hard to predict, the forecasts are rarely correct. Expect figure is -521k so any variation from this and we can expect some rate movements.

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Sterling to EUR & USD rates tumble

Yesterdays Trading
The pounds run could not last forever, and yesterday was the end of the continued gains for Sterling. The pound dropped heavily against both the Euro and the Dollar, wiping out the recent gains the pound has made. As outlined in yesterdays report, those clients that left it to chance in the hope rates would continue to climb may have missed their chance. Clients that placed Stop and Limit orders, in order to aim for a higher rate while protecting themselves limited their loss to management and predictable levels.

So, why the sudden drop? It’s all to do with deteriorating market sentiment. Despite a jump in services sector data from the UK yesterday that pushed the pound higher, the main reason for the decline is again mainly due to the dollar.

As outlined in other posts this week, Sterling has gained on the back of the US Dollars losses, as investors moved funds from the dollar to the pound. Now, other US data has pushed investors back, as weak U.S. employment and services sector data also stung optimism on the global economic outlook, further helping the dollar against higher risk currencies such as sterling.

A worsening political crisis for the Prime Minister Gordon Brown also helped knock the pound, as Communities Secretary Hazel Blears became the latest high profile minister to tender her resignation from the government. The political turmoil in government has knocked the pound, although not by very much.

Blears’ decision to step down follows Tuesday’s resignation by interior minister Jacqui Smith.
The resignations are seen as undermining Brown’s authority on the eve of European and local elections in which his Labour Party is widely forecast to suffer a dismal defeat. “These political dynamics are likely to weigh on sterling too,” Rabobank’s Stretch said.

Interest Rates
Today is an important day, as we see interest rate decisions for the UK, EU and Canada. Expect volatility in rates one way or the other, and do not expect things to stay the same for long!

Analysts do expect rates to be left on hold for both the UK and EU, and the main thing analysts and the markets will be looking for, is to see whether policymakers make any further announcements on its quantitative easing programme.

If its announced this will be increased, then expect Stering exchange rates to continue to fall. If however there is no announcement for further measures, we could see a recovery.

In the EU, the consensus is that rates will be left on hold at 1%. I’m going to go out on a limb however, and say that there is a chance that rates will be cut, possible by 0.25% or even 0.50%. also watch for any QE announcements here, as that will also undermine the Euro.

So, all is not lost. If you are buying currency with Sterling, you will want no QE measures from the UK, some QE from the EU and a rate cut there also. This will help rates recover. If you are selling currency back to Sterling, then medium term forecasts do suggest rates will climb by year end, so you may wish to take advantage of the current drop and lock rates now.

Whatever your requirements, open an account with us today (click the orange banner below to take you to the online application form), and you can then discuss the options available to you for your specific requirements. Registering with us is free, does not obligate you, but gives you the opportunity to discuss your needs with an experienced broker that can help you give you all the information you need to make an informed decision on when to buy.

Todays Data
UK
09:00am – Halifax House Prices
12:00pm – Bank of England Interest Rate Decision

EU
10:00am – Retail Sales
12:45pm – ECB Interest Rate Decision

US
13:30pm – Jobless Claims
13:30pm – Non-Farm Productivity
13:45pm – Fed Chairman Speech

Canada
14:00pm – Interest Rate Decision

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Sterling rally continues

Belief that the global economy is recovering has helped Sterling continue its gains this morning. At the time of writing rates are as follows:

GBP/EUR 1.1650 – 6 month high!
GBP/USD 1.6626
GBP/AUD 2.0180
GBP/CAD 1.7968
GBP/NZD 2.5507
GBP/JPY 160.02

Pound Euro rates are now at a 6 month high, and the rise is being driven by investors returning to perceived higher risk currencies like Sterling. Be aware though, the Euro is also gaining, just not as much as the pound which is why rates are rising. Today we have some important GDP data from the EU, and if its better than expected these gains may be short lived.

Another reason for the pounds rise is the weakening of the US Dollar. Following news that General Motors, one of the worlds largest car makers have gone into recievership, this has severely dented confidence in the US economy. So, as investors move their funds from USD to other currencies, Sterling is the winner as the recent surge in it’s value demonstrates.

It is in these times that it is important to make decisions on when to purchase your currency. If you are buying with Sterling, then rates are now at record levels for many currencies, and so serious consideration is needed to fixing your rate while times are good. Holding out in the hope rates will continue to rise is simply a gamble. Of course you could win and rates may keep going up, but as is often the case, spikes like this are extremely short lived and rates could quickly drop back away.

As mentioned in yesterdays post, it is situations like this where Limit Orders allow you to continue aiming for a higher rate, while at the same time placing a Stop Loss order so if rates do tumble, you are protected and dont lose out completely. Leaving it to chance is a risky strategy.

For those selling currency back to Sterling, while rates may climb or may drop in the short term, most medium term forecasts do suggest that rates will climb this year, and so if I was selling a currency back to Sterling, I would move very quickly.

Click the orange banner to open a free trading facility with FCG – this allows you to discuss your requirments without any obligation, and allows you to have all the information you require to make an informed choice of when to fix your rate.

UK Confidence
In another boost for the pound, UK consumers were more optimistic last month about the future than they had been for six months, according to the Nationwide Consumer Confidence index.

The index hit 53 in May, up from a reading of 51 the month before and the highest reading since November. Despite the improved outlook for the future, consumers remained pessimistic about the current situation. “It is likely that confidence will remain fragile,” said Nationwide’s chief economist Martin Gahbauer.

Todays Data
We have some data for the UK, EU and US today, however most will be waiting for the major data releases tomorrow, namely the interest rate decisions for both the UK and EU.

We have already had GDP data from Australia that was much better than expected which has dropped the GBPAUD rate slightly.

For the UK today we have Purchasing Managers index and BRC Shop Price Index data.

For the EU we have Purchasing Managers Index, Gross Domestic Product and Prouducer Price Index

For the US, this afternoon there is some employment data, Factory orders and mortgage applications.

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