Foreign Exchange Daily Market Update 11/07/11

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The Pound finished last week much higher against the Euro but slightly lower against the US Dollar in the foreign exchange market. The GBP/EUR exchange rate was quite low at Monday’s market open, trading at 1.1090, but moved up steadily over the week to close on Friday at 1.1246, actually hitting a high of 1.1280 during the mid-afternoon on Friday; a much-needed boost for people buying Euros. The GBP/USD rate opened at 1.6110 and fell to a low of 1.5935 on Friday morning, before picking up slightly to close the week at 1.6031.

The economic calendar provided a mixed picture for the UK last week. Monday saw the release of June’s PMI construction figure, which saw a downturn from 54.0 to 53.8. Tuesday was slightly more positive with June’s PMI services figure coming in above estimates, showing an improvement from 53.8 to 53.9. On Wednesday, the UK’s housing market received a welcome boost, with the Halifax house price report showing a monthly increase from 0.4% to 1.2%, and the 3 month-to-June figure showing an upward move from -4.2% to -3.5%. Thursday kicked off with Industrial and Manufacturing figures, which both showed upturns in the annualised and month-on-month levels, but the market was more focused on the Bank of England’s interest rate meeting. As expected the central bank kept the base rate and the asset purchase target on hold, with the market feeling that the MPC had little other option to do so, with an interest rate having the potential to destroy the UK mortgage market and make thousands of homeowners default, and any increase to the asset purchase target could start driving inflation higher. The week closed out on Friday with PPI input and output figures, with the annualised levels showing an increase from 16.1 % to 17% and from 5.4% to 5.7% respectively.

The week ahead for the UK is data-heavy; with the economic docket opening on Monday with RICS house price balance figures reporting. The forecast is for an improvement from -28% up to -25% which would be positive for the housing market. Tuesday will see the release of the Nationwide Consumer Confidence figure, with any drop or increase likely to create waves in the currency exchange market. The data continues on Tuesday with annualised and monthly consumer price index figures, along with retail price index and visible trade balance figures reporting. The Pound is likely to take direction from any increased positivity from these figures. Arguably, the most market-focused data of the week is on Wednesday, with the ILO unemployment rate expected to hold at 7.70%, jobless claims expected to fall, but the claimant count rate to show a slight percentage increase. The UK labour market is still quite fragile, and should there be any signs of weakness, the Pound could certainly suffer.

The Euro suffered badly in the foreign exchange market last week. As well as being hammered by the Pound, the EUR/USD rate also fell steadily across the week, dropping from 1.4525 on Monday’s open to close at 1.4254, hitting a low of 1.4204.

The European economic docket was overall fairly negative across the week. Monday saw a drop in Euro-zone PPI, the annual rate falling from 6.7 to 6.2%. Tuesday saw a similar pattern with Euro-zone PMI composite figures along with retail sales falling. The negative pattern continued through Wednesday, with German factory orders for May reporting a fall, from 2.9% down to 1.8%, and Thursday opening with German industrial production falling annually from 9.3% to 7.6%. The main focus of the week was the European Central Bank’s interest rate meeting on Thursday. As was almost certain, the ECB pressed on with their tightening of monetary policy, and raised the base rate to 1.5%, up from 1.25%, the second rate-hike this year. Traditionally a rate hike would see a currency appreciate; but whilst the raising of rates will help to counteract inflation – the ECB’s sole mandate, it could well prove damaging to European nations, businesses and consumers with any form of high-level or base-rate linked borrowing., and could stunt economic growth across the Euro-zone. The week finished with some positive news, in that the German trade balance continued to show an increased surplus, with the level increasing from 10.8 billion Euros to 14.0 billion Euros.

This week’s European data releases will see some high-level market data. Tuesday will see the release of German CPI figures, with the EU harmonised level set to fall from 2.4% to 2.3%, a result the ECB will take heart from as it may support their thinking that higher rates will bring inflation down. Wednesday will focus on Euro-zone industrial production figures, with the annualised rate set to fall from 5.3% to 4.8%, but the monthly figure to increase from 0.2% to 0.4%. The Euro currency is likely to see sharp movement depending on the tone of the ECB’s July report which will be released on Thursday, along with Euro-zone CPI (inflation) figures. If the ECB report contains any phrases pertinent to another rate-hike this year the currency could well weaken, as the market would view it as a bridge too far for the Euro-zone, and almost certainly damaging to economic growth across the European area.

The US Dollar managed to take advantage of the poor market reaction to the ECB’s rate-hike, and gained considerably against the Euro across the week, also pulling back slightly against the Pound before falling away on Friday afternoon following very disappointing Non-farm payroll figures.

The US market was closed on Monday, for the 4th of July celebrations, so Tuesday was the first sign of any economic data; with factory orders for May showing a slight increase, up from 0.8% to 0.9%. Wednesday’s main economic release was negative though, with ISM non-manufacturing figures reporting a downturn in activity, from 54.6 to 53.3, not supporting the US currency and economic outlook. Thursday was a slight glimmer of hope for the US, particularly the labour market, with the ADP employment change figure increasing drastically from 36,000 jobs to 157,000, smashing market forecasts of around 70,000. This helped the US Dollar hugely, with the figure indicating that the following day’s non-farm payroll data could also be equally as impressive. This was not to be the case though, with Friday’s headline figures showing that the US unemployment rate went up, to 9.2% from 9.1%, and the No-farm payroll figure disappointed hugely, recording a drop from 54,000 down to a mere 18,000. It was this huge miss on estimates that saw the Dollar lose its gains and the GBP/USD exchange rate push back up from 1.5935 to 1.6031 by the weeks close.

The US economic docket this week will kick-off on Tuesday with US trade balance figures; and with the market expecting the negative trade balance to increase, it will be an indication of the US’s increasing reliance on imported goods, and will not be positive for the currency. The Federal Reserve will also release the minutes from their last policy meeting on Tuesday; with the market watching closely for any signs of a rate-hike in the offing, and hoping for positive comment in terms of future growth prospects. Wednesday will see Fed Chairman Ben Bernanke present his semi-annual monetary policy report to Congress, with the currency market poised to take sharp movement from any negative rhetoric on the part of the Fed. It is almost certain that the issue of the US’s debt ceiling needing to be raised to guarantee future repayments will be brought up, as Bernanke may be pressed for comment on how a refusal/or approval from the IMF of the plan could affect policy. Thursday will see the release of advance retail sales figures for June, which is expected to show an upturn, along with PPI figures. Friday could have a huge bearing on the direction of the US Dollar, with CPI annual and monthly figures being released. Any increases in the overall inflation rate could put pressure on the Federal Reserve to start thinking about raising rates, and on the flip-side, a downward movement would dampen any rate-hike expectations, possibly weakening the currency. The final day of the week will also see the widely-respected University of Michigan confidence index report, with the market forecasting an upturn in the level; which could benefit the US Dollar. The Michigan confidence survey is seen as a very timely indicator, and a good early predictor of economic upturn or slowdown by the foreign exchange market.

Mike Hood
KBRFX

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