Foreign Exchange Daily Market Update 16/06/11

The Pound ended the day with the rate practically unchanged against the Euro; at 1.1372, but considerably lower against the US Dollar, falling from 1.6368 at the open of the European market, down to just under 1.6200 at the close of play. The influential data on the UK’s economic docket yesterday was all labour-market related. The Office for National Statistics (ONS) reported that claimant count increased by 19,600 to 1.49 million in May. Analysts had expected a rise of 7,000 and the figure represents the biggest rise since July 2009. However, the jobless total fell by 88,000 in the three months to April to 2.43 million - its biggest drop since August 2000. The UK Government is hoping that private firms will create jobs as posts are cut in the public sector were given a boost with news that employment in the private sector increased by 104,000 in the first three months of the year to 23 million jobs. Annual earnings increased by 1.8% in the year to April, down by 0.6% on the previous month, largely because of lower growth in bonuses in private firms.

Foreign exchange traders looking at today’s UK economic docket will focus solely on retail sales, with levels forecast to drop both monthly and annually, from 1.1% to -0.6% and 2.8% down to 1.5% respectively. A growth in retail sales is traditionally considered a good indicator of increase in consumer demand, and consequently economic growth, so should the figures report lower as expected, it doesn’t provide a positive outlook for the UK economy, so the Pound may well come under pressure.

Europe continues to face pressure in the currency exchange market in light of the struggle to find a suitable solution for Greece. This saw the GBP/EUR exchange rate move drastically overnight, up from 1.1370 to peak at 1.1460 in the early hours of this morning. Even with the rate falling back slightly to 1.1420 currently, it makes it a lot cheaper for UK based consumers who are buying Euros. In regards to the potential Greek bail-out: it is a German-inspired plan that suggests a further cash reserve may be needed by the Greek government if the European Central Bank refuses to accept its downgraded bonds as collateral. Such a plan to rework Greece's debts could force Euro-zone countries to fork out billions of extra Euros to avoid economic collapse. The European Commission warned an extra 20 billion Euros could be needed. Protests have broken out in Greece as a 24-hour anti-austerity strike by the country's largest labour unions crippled public services.

Former IMF chief economist Raghuram Rajan’s comments may go some way to settle the market as he stated that restructuring of Greece's debt looked increasingly probable as Athens lacked the political will to carry out widespread privatizations of state assets and budget tightening. "If the debt restructuring happens in a way that banks and markets are prepared for, even if not publicly but at least privately, it is very well containable," he said. But there was a stark warning from Rajan, with him saying "A restructuring which happens because the dialogue breaks down will be more complicated because that would suggest that there will be implications for Ireland, for Portugal and so on, and that could be more problematic down the line."

The European economic docket will be focused on inflation today, with Consumer Price Index (CPI) figures set for release at 10:00. The data may well give the market some doubt that an imminent rate-hike by the ECB is necessary, as CPI is set to hold unchanged at 1.6% month-on-month, and the annual figure is set to drop slightly from 2.8% down to 2.7%. Even though a figure of 2.7% annually would be above the ECB’s target level, a drop may indicate that the rise in inflation is temporary; and will fall naturally over time, consequently not requiring a further tightening of monetary policy to contain it.

The US Dollar strengthened greatly against both the Pound and The Euro yesterday, making it more expensive for UK consumers who are buying Dollars. The Greenback was helped by figures that reported a jump in consumer prices, both monthly and annually. The fact that CPI rose to 3.6% annually, and up from 1.3% to 1.5& month-on-month shows that consumer demand in the US is increasing, and should the inflation figures start to rise too fast, it will put pressure on The Federal Reserve to look at tightening monetary policy to prevent price growth becoming damaging.

The economic docket from the US today is comprised mostly of low- to-medium level market data, which includes building permit figures, along with housing starts and initial jobless claims. Slight increases in any of these figures would provide support to the US Dollar, as it would show a positive contribution to the economic picture. One figure that will be watched closely by the market is the Philadelphia Fed survey, which focuses mainly on manufacturing. An increase, which is predicted by the market, would indicate a positive outlook from manufacturers, and could see increased production levels, which is positive for the Dollar.

Mike Hood
KBRFX

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