Foreign Exchange Daily Market Update 20/06/11

The Pound closed the week lower against the US Dollar, but higher against the Euro. After the GBP/USD peaked at a high of 1.6440 on Wednesday; a combination of poor UK economic data and some positive signs from the US’s economic docket, the rate fell to 1.6142 on Friday, making it more expensive for UK consumers who are buying Dollars. The GBP/EUR rate hit a mid-week high of 1.1456 in the early hours of Thursday morning, giving a boost to UK consumers buying Euros; but despite some serious troubles in Europe, The Pound failed to hold its gains and slipped back to trade just below 1.13 in the foreign exchange market by the close of play on Friday.

The major disappointments on the UK’s economic docket last week were from the retail and jobs markets. Jobless claims increased by 19,600 for the month of May; way beyond analysts’ estimates, painting a dour picture for the UK’s labour market. UK Retail Sales also fell, both month-on-month and annually, marking a sharp drop in consumer demand which will also affect overall economic growth. Any hopes of increased inflation pushing the Bank of England into a rate-hike were also pretty much wiped out last week, with UK CPI figures reporting a marked slow-down in price growth month-on-month. The CPI figure showed growth had slowed fairly rapidly, dropping from levels of 3.7% down to 3.3%. While the level remains above the Bank of England’s target, it does support the view from the IMF and some senior economists that inflation will fall naturally over time, and the current level does not justify a tightening of monetary policy.

The economic docket from the UK this week does contain some high-level market data. Tuesday will see the release of Public Sector Net Borrowing and Public Sector Finance figures for May; and the currency exchange market will be watching to see if the UK Government is sticking to its pledge of implementing deep cuts to try and restore the UK’s balance sheet to respectable levels. The Bank of England will release the minutes from their last policy meeting on Wednesday, and this is sure to be on of the key releases of the week. The minutes will be studied closely for any signs of a shift in rhetoric; and the all important voting numbers. The British Bankers Association (BBA) will publish its figures for loans for house purchases on Thursday; any improvement in the UK’s housing market will be beneficial to overall sentiment, and possibly the currency. The CBI will also release their figures for reported sales for June on Thursday, and that will be the last piece of data for the UK this week.

Europe continues to face strong headwinds from the as yet unsolved bail-out situation in Greece. Euro-Zone finance ministers are continuing to try and push through a plan which could see Greece receive up to 20 billion Euros in financial aid. While the situation remains unresolved, the currency is open to movement in the foreign exchange market, but over the past week still managed to hold firm against the Pound and the US dollar.

The past week saw Greece’s credit rating cut to ‘CCC’, and in what could be a slight blow to increased rate-hike expectations in Europe, Euro-Zone CPI figures reported a sharp pause in growth month-on-month, and a slight drop in the annual inflation rate. With the ECB widely expected to push on with a tightening in monetary policy, a slow in the inflation rate does add fuel to the fire that a further rate-hike, whilst beneficial to the currency, could start to be ‘damaging’ for overall economic growth across the Euro-zone.

The week ahead for Europe contains a lot of economic data. Tuesday will see the results of the ZEW survey on economic sentiment for June; with the figure having the potential to influence the direction of the currency should there be any major drop or increase in sentiment. The focus will again be on opinion and market sentiment on Wednesday, with the release of Euro-zone consumer confidence. In light of the current issues in Europe, the market will look to the effect that this has had on consumers, and will be an indication of future market trends. Thursday will focus on PMI figures, from France, Germany, and the overall Euro-zone. These figures will be closely watched by the market, any sharp drops could well weaken the Euro. Friday will see German retail sales figures released, along with the GfK consumer confidence survey for July.

The US Dollar peformed fairly well across the course of last week. The economic docket provided great support for the currency, with mostly all the market data released throughout the course of the week indicating a positive outlook for the US economy.

Retail Sales figures were up, beating analyst’s estimates. Producer Prices rose sharply from 6.8% up to 7.3%, along with building permits and housing starts showing good gains. Jobless claims fell for the month of May, showing that the US labour market is making a marked recovery. One of the big figures of the week was the CPI index. The figure showed that price growth increased annually; up from 3.2% to 3.6%, which is positive for the overall economy, and may indicate to the Federal Reserve that should there be a contained sharp rise in inflation, it could be time to start looking at tightening monetary policy, which would benefit the US dollar.

The US economic docket for this week will start with Tuesday’s existing home sales figures. This will give an insight into the health of the housing market in the US, and an upward movement would be positive for the currency. Wednesday will be a major day for the Us economy, with The Federal Reserve announcing their interest rate decision for the month, but with the market widely predicting no change; it will be the accompanying press conference that is watched closely for any shift in rhetoric from policy makers. Thursday will see the market focus shift back to housing, with new home sales figures set to report a slight drop. The economic week will close with durable goods orders figures reporting on Friday, and with analysts expecting a sharp increase, the US Dollar could well close the week with a sharp boost.

Mike Hood
KBRFX