Foreign Exchange Daily Market Update 07/07/11

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The Pound continued to gain against the Euro, but did fall slightly against the US Dollar in the foreign exchange market yesterday. The GBP/EUR exchange rate moved up from 1.1147 to trade above 1.1166 by the end of the day, a welcome change from the previous few days’ downward movement, and making it cheaper for UK consumers buying Euros. The GBP/USD rate slipped slightly, from the mornings open at 1.6026 down to 1.5993 by the close of the UK business day, putting further pressure on people buying Dollars. There was good news from the UK yesterday, with Halifax reporting that house prices rose by 1.2% in June, beating the previous month’s level of 0.4%. Prices also gained 0.7% for the 3 months to June, up from -4.2% up to 3.5%. It is a positive sign, but the UK housing market still remains weak, and it is this weakness that will be restricting the Bank of England from making any increases to the base interest rate, as a rate rise could see a large number of mortgage defaults, with household finances in the UK still being extremely tight.

Today has already seen the release of Industrial Production figures for May, which saw the figures report an increase in output month-on-month from levels of -1.7% up to 0.9%, which although a good improvement, was below market forecast for the figure to report at 1.1%. The main market event for the UK today will be the Bank of England’s interest rate meeting. It is almost certain that the base interest rate will not be changed, as the UK economy is still in a weak state. The housing market, along with the labour market are still under great pressure, and with the Government still to implement further austerity measures to try and reduce the UK’s debt load; it is not the most positive of outlooks.

The Euro slipped against the Pound and the US Dollar yesterday, ahead of the currency exchange market pricing in the almost certain possibility of the European Central Bank raising interest rates today. Also, ratings agency Moody’s cut Portugal’s credit rating to junk levels, and placed a negative outlook on the economy. The EUR/USD exchange rate fell from the morning’s open of 1.4375 down to 1.4321 by the close of play. The economic docket from Europe yesterday though showed a positive outlook, with German factory orders rising month-on-month from 1.8% up to 2.9% , and the annual level also rising from 10.6% up to 12.2%.

The day ahead will focus on the ECB’s interest rate decision. The foreign exchange market is widely-expecting another rise in the base rate, from the current levels of 1.25% up to 1.5%. The ECB has been issuing a strong rhetoric for the past few months, and despite fears that a rate rise could have some negative effects on periphery nations in Europe with weak markets and high borrowing levels, the bank look set to press ahead with another hike.

The Dollar did pull up slightly against both the Pound and the Euro yesterday, with ongoing uncertainty in UK and European markets possibly aiding the Dollar, as investors may be looking to move their money into the widely-regarded ‘safe-haven’ currency. The only real economic data of note yesterday from the US showed that ISM non-manufacturing figures dropped, from 54.6 to 53.3. It seemed though that the market took little reaction to the figure, with not much movement on the market on its release.

Today will see the release of ADP employment change figures for June, with the forecast for a rise from the previous month’s level of 38,000, up to 70,000. Should the figure come in line with expectations, it would be a positive sign for the US labour market, and would help contribute to the overall economic picture.

Mike Hood
KBRFX

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