Foreign Exchange Daily Market Update 13/07/11

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The Pound finished the day slightly lower against the Euro, but reversed the pattern of the past few days to gain some ground back against the US Dollar in the foreign exchange market. The GBP/EUR rate dropped from the morning’s open at 1.1425 to finish the day trading at 1.1374, still good levels for people buying Euros; considering that much of the past 2 weeks was spent with the exchange rate hovering closer to 1.10. The GBP/USD exchange rate went against the current trend, to gain from the morning’s level of 1.5819 to trade up at 1.5935 by the day’s close, welcome news for people buying Dollars who would prefer to see the rate trading over 1.60.

The economic data release form the UK yesterday wasn’t hugely positive though. CPI figures showed a drop in the inflation rate, annually, from 4.5% down to 4.2%; which puts a dampener on any chances of a rate-hike from the Bank of England, and re-affirms policy-maker’s stance that high levels of price growth are temporary, and will ease over time. Retails price index figures showed no increase, with the figure holding at 235.2 amid forecasts for a rise to 235.8. The UK’s trade balance also showed a worse situation than expected, with the negative deficit increasing to -£8.478million from -£7.643million; reinforcing the UK’s huge over-reliance on imported goods.

This morning has already seen some fairly important economic data released from the UK, and it is all labour-market focused. The ILO unemployment rate figures have been released, with the rate staying unchanged at 7.7%. The claimant count also remained unchanged at 4.7% for the month of June, but a slight negative twist saw the amount of jobless claims increase to 24,500 in June, up from 22,500 the previous month. This was a big surprise to the market as forecasts were calling for the number of jobless claims to drop to around 15,000, and is a blow to what is still quite a weak labour market in the UK.

The Euro managed to gain some ground back against the Pound, and also the US Dollar yesterday. The EUR/USD rate pushed back up throughout the day from 1.3845 in the morning, to 1.4016 by the market close. There was some positive news from the European calendar yesterday, with French CPI showing an annual increase, up from 2.2% to 2.3%, showing that there is a small amount of price growth despite the European base-rate being raised twice this year already. German CPI however, fell, with the EU harmonised figure showing a drop from 2.4% to 2.3%.

There is not much data scheduled for release from Europe today, but we will see shortly Euro-zone industrial production figures, with the market expecting to see slight increase in the monthly level, but a small downturn in the annual production rate. This could well affect the currency exchange market, as Europe and particularly Germany relies heavily on industry, and any slowdown in this sector could be detrimental to overall economic growth.

The US Dollar weakened off across the board yesterday, with the market focusing on the release of the Federal Reserve’s minutes from their last policy-meeting, which showed above all, indecision among policy makers on how to proceed. Some policy-makers argue that if the unemployment market stays weak, the Fed should consider expanding the money supply through quantitative easing – or buying Treasury bonds. However, some of the Fed’s policy-makers argued that the current situation of moderate inflation, along with high unemployment suggests there may be more fundamental changes at work in the economy, with workers shifting sectors and losing skills because of long periods of unemployment. Those structural changes in the economy, these officials argued, “May have temporarily reduced the economy’s level of potential output,” the minutes said. If that’s the case, they added, the Fed may need to start pulling money out of the economy sooner than markets now anticipate. Along with the US’s negative trade balance increasing from -$43.6billion up to -$50.2billion, the currency has suffered in the market.

Today will see the foreign exchange market focus again on rhetoric, with Fed chairman Ben Bernanke set to make his semi-annual report to Congress, and will be sure to face questions on future policy, and the current debt-ceiling issue, as well as the market looking to the chairman’s expectations and assessment of the overall economic picture in the US.

Mike Hood
KBRFX

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