Currency Forecasts

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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Sterling remains on back foot.

Rates as at 08:30am
GBPEUR 1.1561
GBPUSD 1.6104
GBPAUD 2.0579
GBPNZD 2.5545
GBPCAD 1.8701
GBPZAR 13.0682

Yesterdays Trading
Sterling extended losses yesterday, hitting a 1 month low against the US dollar and the Euro after weak UK manufacturing output data on Tuesday further clouded optimism that the economy may be improving.

Brushing off figures on Wednesday showing a rise in British consumer confidence, the UK currency continued to smart from Tuesday’s unexpected fall in output, and was on track to post its fifth straight day of losses.

Data yesterday also showed a slight fall in UK house prices in June, but they had limited impact on the market as their reversal from a jump the previous month was muted.

“The overriding theme in the next few weeks will be a fear of asset capitulation that will dominate in the short term,” said Neil Jones, head of European hedge fund sales at Mizuho in London.

“As a result, sterling will have more downward momentum,” he said, adding that he expected sterling would likely make a sustained push below the $1.60 level in the near term.

So, where medium term and long term forecasts suggest the pound will rise, in the short term we could well see further volatility to the downside.

Bank of England.


The Bank of England is expected to keep interest rates at their historic low of 0.5% on Thursday.

But it may announce an extension of its quantitative easing scheme under which it prints money to buy bonds in order to stimulate the economy.

At the moment it plans to spend £125bn, but it can increase that by £25bn without asking the Treasury. At the current rate of spending, the £125bn will all have been spent in the next two weeks.

Taking on the extra £25bn would allow the Bank’s Monetary Policy Committee (MPC) to see the next set of quarterly economic forecasts before it decides whether to ask the Treasury to extend the scheme further.

Since the MPC last met, the amount that the UK economy contracted in the first three months of the year has been raised from 1.9% to 2.4%, a decline not exceeded for 51 years, which is what caused the recent decline of Sterlings Value.


Finally
A drunken Brit celebrated an inheritance by trying to give it away to strangers at a Spanish airport. The 59 year old, dressed like a tramp, laughed as he started handing out a pile of 52,000 euros in notes at Palma airport on the holiday island of Majorca before police stopped him.

The man, who had apparently just received the money as an inheritance and had just arrived on a flight from Manchester, was bundled onto a plane back to Britain by police.

Which is a shame, as I will be in Mallorca next week! If you were one of the lucky recipients, ensure you contact FCG to obtain the best possible exchange rate for converting your gift back to Sterling.

Todays Data
We have already had German Consumer Price Index, which cam in as expected and therfore caused no movement for GBP/EUR.

For the UK, we have Trade Balance Data at 09:30am, which 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 pound.

More importantly, at 12:00pm the Bank of England announce their interest rate decision. As outlined above, the rate will probably be left at 0.5%, however if there is any announcement of further Quantitative Easing, then expect a fall in Sterling Exchange Rates.

Later from the US, there is some Jobless Claims data.


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Sterling remains weak following poor data

Sterling’s Weakness against the Euro
Sterling fell across the board yesterday, hitting a 1 month low against the EUR after weak UK industrial production data fanned further doubts that the economy is in for a quick recovery.

The news dashed hopes that the economy may have rebounded in the second quarter after it suffering its steepest fall in 50 years during the first three months of the year. The news halted the rise of the pound we have seen up until the start of July.

There are also concerns that the Bank of England will expand its quantitative easing programme when it announces its latest policy decision tomorrow. Last month the headlines proclaimed an end to the recession after growth returned in April. However, figures show that the UK economy is stagnating rather than continuing to contract at a sharp pace.

Bank of Scotland Treasury currency strategist Naeem Wahid said : “Sterling is one of the weakest currencies out there. This data has wiped out some of the signs of recovery and people are unwinding GDP expectations, which has weighed on sterling”

More Quantitative Easing by BoE?
Analysts said the weak industrial output figures yesterday increase the chances that the BoE will increase its asset purchasing programme.

“Sterling remains a broad underperformer as the unexpected 0.5 percent decline in May manufacturing output adds to existing concerns over further debt monetisation by the Bank of England,” CMC Markets analyst Ashraf Laidi said.

Many predict the central bank will raise its 125 billion pound asset buying programme by a further 25 billion pounds to the maximum permitted without further finance ministry approval, or possibly ask for more, though some expect that next month.

Analysts also found little to cheer in an earlier British Chambers of Commerce survey, which showed the UK is not yet out of recession despite a marked easing in the pace of decline in manufacturing and services during the second quarter.

So, while the markets look at the daily data releases, the markets are in limbo as there is uncertatiny of the value of the pound. We still forecast a general strenghtening of Sterling in the medium to long term, and rates should have pushed through €1.20 by year end. In the meantime however we could see continued weakness if the data continues to be bad.

UK Bank Reform
The UK government is set to announce its plans today to reform the financial system to prevent future crises. New powers will be proposed to curb bank lending and prevent asset bubbles such as the housing boom, undermining the real economy.

The governor of the Bank of England, Mervyn King, has said that without increased powers his role is merely to “preach sermons”. Many think he will get little extra power. However, if the Conservatives win the next election they have pledged to give the Bank of England a lead role in financial regulation.

My view is that when power was taken away from the BoE, in favour or a 3 way system of regulation for BoE, FSA and Government meant that no one body was responsible as a whole, and no-one could see the wood from the trees. Perhaps the FSA’s role will be reduced and more power given back to the BoE in the future.

Finally,
Having grumbled about billions spent on banks, the Irish have rescues one of Ireland’s few original contributions to world cuisine: the “spice burger.”

The Dublin based makers of the crumb-coated beef burger were running out of cash but Walsh Family Foods could not raise enough and called in a receiver. However, a public outcry and a “save our spice burger” campaign on Facebook helped receivers KPMG to secure enough new orders for the more than 50-year-old company to resume production with 20 workers.

The recession has generally boosted demand for cheap fast food but the Irish Times said Walsh Family Foods, which also sells in Britain, had sustained losses due to the weakness of sterling versus the euro and tougher competition.

“It’s well and truly back,” Walsh said of his burger. “No matter what happens, it’s going to be on the market for a long time to come.”

Phew.

Todays Data
UK – Halifax House Prices
EU – Gross Domestic Product
Ger – Industrial Production
US – Crude Oil Stocks
US – Consumer Credit

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