Currency Forecasts

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.

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

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

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

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

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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BoE and ECB Interest Rates & Quantitative Easing

The pound was mixed yesterday, falling against the US Dollar but gaining slightly against the broadly soft euro, a recovery which helped lift sterling up from 5 month lows hit earlier in the day.

There were no major UK economic data releases yesterday with markets waiting for todays announcement from the Bank of England. Rates @ 08:30am are as follows:

  • GBP/EUR 1.0868
  • GBP/USD 1.6061
  • GBP/AUD 1.7771
  • GBP/NZD 2.1682
  • GBP/CAD 1.6939
  • GBP/DKK 8.0883
  • GBP/JPY 141.68
  • GBP/ZAR 11.771

Bank of England & ECB Interest Rate decisions.
The Bank of England and European Central bank will announce their decision on interest rates today. The BoE may also expand its Quantitative Easing programme. We expect the BoE to hold interest rates at 0.5% for the 7th month in a row, and the ECB will also likely leave rates unchanged at 1%.

The key to what will happen with exchange rates today is whether the BoE will maintain its programme of pumping money into the economy – called quantitative easing – but is not tipped to extend it. However, there is an outside chance that the amount of money being created and pumped into the economy will be raised.

The BoE have already said that the programme will remain in place, but analysts expect the bank to wait until more economic figures are released, and then expand the programme in Novemeber. We have been surprised before though, so dont’ discount a chance that more money may be created today. Because of the poor manufacturing data this week, there’s a chance this means the BoE will expand the programme today.

The dramatic 1.9 percent fall in UK industrial production followed a mixed bag of economic data in the past week and raised the prospect that the economy may not return even to slight growth later in the year, as the UK government expects.

“A clear exception to the global recovery story is sterling, which remains vulnerable after yesterday’s much weaker than expected August industrial production figure,” Calyon strategists wrote in a note on Wednesday. “The market remains down on sterling,” they said.

UK Economy not growing
Contrary to expectations, the UK economy did not grow in the third quarter of the year, an influential economic group has predicted. Gross domestic product (GDP) was unchanged from July to September, the National Institute of Economic and Social Research (NIESR) calculated.
Official GDP figures for the third quarter will be released on 23 October.

Many economists predicted there would be growth in the three-month period, which would end the UK recession. The NIESR blamed the economy’s failure to register any growth on weak industrial production in August, especially reduced activity in the oil industry.

The pound is weak due to poor economic data, while most other economies are recovering. Why? We’re one of the only economies trying to spend their way out of the problem, and the levels of government debt are huge, with no plan at all on how to repay it. EU economies are recovering much faster than ours, and the QE programme is keeping the pound weak.

Markets have priced in much of this weak data already, which is why the pound is so weak. Today will be key. Depending on what the BoE do at lunchtime, then rates will swing either way.

If you have a requirement, you can fix rates in advance of this decision to protect against any adverse movement. Doing nothing means you may gain, or equally you may lose. If you do wish to wait to see what the BoE do, then consider placing Stop and Limit orders to make sure you can control any loss should markets not go your way.

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Pound remains weak, eyes now on BoE tomorrow

Good Morning. Sterling hit a 5 month low against a basket of major currencies yesterday, and a new 1 week low against the Euro after an unexpected fall in UK manufacturing output raised doubts about the British economy’s recovery prospects. Rates at 08:30am are as follows:

  • GBP/EUR 1.0815
  • GBP/USD 1.5916
  • GBP/AUD 1.7827
  • GBP/NZD 2.1615
  • GBP/CAD 1.6804
  • GBP/JPY 140.72
  • GBP/CHF 1.6368
  • GBP/ZAR 11.775

Analysts said the market was caught off guard and surprised by the weak production data, and this drove investors back towards the safe haven US Dollar. The net result is slightly lower exchange rates. The currency markets at the moment are prone to react strongly to weak data, and the problem with the pound, is that it is already trading with a negative bias, so any negative number for the UK is a signal to sell sterling, and this is what’s keeping rates low at the moment.

The dramatic fall in UK industrial production followed a mixed bag of economic data in the past week, and raised the prospect that the economy may not return even to slight growth later in the year, as the UK government expects.

With Tuesday’s poor data out of the way, the market now looks forward to the announcement by the Bank of England tomorrow. The BoE is expected to keep interest rates at a record low 0.5% and maintain the pace of its asset purchases (Quantitative Easing)

Analysts expect the central bank to wait until its next set of growth and inflation forecasts in November before making any alteration to monetary policy, however there is the chance further measures will be announced tomorrow. It’s impossible to call, but much of the expected weak data for the pound is already priced into the market. So, if no announcement is made for futher QE, expect rates to rise slightly. If further QE measures are indeed announced, we may see rates drop further.

So, regardless if you are buying Euros or Selling Euros, rates could move either way in the next few days. It’s in uncertain times like this that Stop Loss and Limit Orders are very effective. As markets could swing in either direction, a Stop Loss order means that should markets move against you, your currency gets secured at a pre-agreed level, limiting any loss from negative movements. Limit orders are the opposite – you place an order to buy at a rate perhaps not currently available.

This means that should markets move in your favour, you can take advantage automatically, while the Stop Loss protects you meaning you’re not simply gambling and hoping the market moves your way. Simply ‘wishing’ the market up is not a reliable economic tool. Currency tools like Stops and Limits allow you to control the market, rather than the other way around!

Australian Dollar
The BoE’s position of keeping rates low contrasted sharply with the Reserve Bank of Australia’s decision to raise rates by 25 basis points to 3.25 percent yesterday. The resulting expansion in official rate differentials ignited a rally in the Australian dollar, and the pound to Aussie Dollar exchange rate hit it’s lowest since 1985. This is not good if you need to purchase AUD.

Earlier in the year I posted several forecasts suggesting that this may indeed happen, and many clients that wanted to buy AUD placed a Stop Loss order just in case. This meant they could still aim for a higher rate, but have not lost out now rates have indeed continued to fall.

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