Monday 27 June 2011

Foreign Exchange Daily Market Update 27/06/11

The Pound finished the week lower overall against both the Euro and the US Dollar in the foreign exchange market. The GBP/EUR rate fell from Monday’s high of 1.1374 down to the week’s low of 1.1168 on Wednesday; before recovering slightly on Friday to close the week out trading at 1.1264. The GBP/USD exchange rate also dropped over the course of the week. From the open at 1.6149, the Pound managed to pick up to a high of 1.6262 on Wednesday, before gradually falling away to 1.5941 by Thursday, and showing hardly any signs of recovery by the week’s end to trade at 1.5980. This was bad news for UK consumers who will now find an increased cost when it comes to buying Euros and buying Dollars.

The economic docket from the UK last week offered no real positive signs for the economy, hence the poor performance of the currency. On Tuesday it was revealed that the amount of money the UK Government had put into public sector finances had increased for the month of May, up from the previous month’s figure of 3.5 billion pounds, to a level of 11.1 billion pounds. Public sector net borrowing also increased, from 7.7 billion pounds to 15.2 billion pounds; a sure sign that the private sector is failing to pick up the slack left by public sector cuts, so the government needs to divert more funds into the coffers to prevent a knock-on effect to economic growth prospects. The Bank of England released the minutes from their last policy meeting on Wednesday, with the Pound taking a sharp downturn as the results showed that the vote to keep interest rates on hold was by a larger margin than the previous meeting. The vote shifting from a 6-3 margin to a 7-2 majority in favour of holding the current rate, and the vote to keep asset purchasing at its current level was at an 8-1 majority. This really rocked the market, and almost counts out any chance of rate hike this year. Thursday did offer a slight positive, with BBA loans for house purchases showing a monthly increase from 29,747 up to 30,509, but it did little to affect the Pound’s slide.

The week ahead does have some high-level market data for the UK, the most notable being Tuesday’s final reading of 1st quarter GDP. The market is predicting no changes in the final reading, with the quarterly growth rate at 0.5%, and the yearly rate at 1.8%. Should there be any revisions though, either to the up or downside, the Pound could see a strengthening or weakening dependent on the outcome. Wednesday will see mortgage approval figures releases, with the market expectation to see a rise in the number of approvals from 45,200 to 46,300, which would be a positive sign for the UK’s housing market. On Friday the currency exchange market will focus on PMI manufacturing data, which is set to see a slight increase, and could benefit the Pound, by showing a positive contribution to the overall economic picture.

The Euro strengthened considerably against the Pound throughout last week, but fell against the US Dollar. An agreement in principle to a bail-out for Greece, along with the Greek Prime Minister George Papandreou surviving a vote of confidence, the market may well be taking heart from the solidarity being shown by the Euro-zone; despite whisperings of unrest from senior officials. The currency was buoyed on Tuesday with European Commission President José Manuel Barroso insisting that Greece will ‘never’ be allowed to go bankrupt.

Economic data across the course of last week offered a mixed picture for Europe; the German producer price index showed a drop month-on-month, from 6.4% to 6.1%; a negative sign for a country that that relies heavily on industry. The German ZEW economic sentiment survey also showed a drop for June, indicating that financial experts across Germany are less confident in current market conditions. This was echoed in Wednesday’s Euro-zone consumer confidence survey, which also showed a drop, from a level of -9.9 to -10.0, showing that any market doubt is also reaching consumers. Wednesday also showed that Euro-zone industrial new orders fell from 14.3% to 8.6%. The negative outlook was somewhat reversed on Friday though, with the German IFO survey showing an increase in business climate sentiment, and current assessment of the economic picture.

This week’s European economic docket will be watched closely by traders, with the possibility of some surprises. Wednesday will see annualised German CPI figures released, with the market pricing in a slight improvement, from 2.4 to 2.5%, which could boost the Euro currency. Also on Wednesday, Euro-zone consumer confidence is forecast to hold steady at a level of -10.0, which is not overly positive, but any lack of a decline is welcome. Thursday will focus on German unemployment, with the overall rate set to hold firm at 7.0%, no improvement, but again showing no decline, which the market may view positively.

The Dollar gained considerable ground against the Pound and the Euro over the course of the week. The EUR/USD exchange rate coming down from the weeks high of 1.4439 on Wednesday, to a low of 1.4126 by Thursday, coupled with the drop in the GBP/USD rate down to under 1.60.
The Dollar’s gain was definitely helped by a positive economic docket fro the week. The market taking heart from the news that existing home sales reported better than expected at 4.81 million for the month, down from the previous month’s level of 5.00 million, but beating analysts estimates. Continuing claims fell from 3,698,000 to 3,697,000, showing a reduction in the number of jobless claimants; a positive sign for the US labour market. Durable goods orders also increased for the month of May, showing an impressive increase; up from -3.6% to record a positive result of 1.9%, way beyond the market forecast.

The US economic docket for the week ahead may not be as positive overall, with Monday’s personal income figures set to hold steady, and personal spending for US consumers set to decline; not a good sign for the overall economy. The market has forecast a positive rise in US consumer confidence, which is set for release on Tuesday, along with the University of Michigan’s confidence index also set to show a positive increase when released on Friday. However, ISM manufacturing is forecast to decline on Friday, from the previous month’s level of 53.5, down to 51.5, which may put a dampener on any gains seen by the currency.

Mike Hood
KBRFX

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