Foreign Exchange Daily Market Update 15/07/11

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The Pound continued its surge against the Euro and the US Dollar in the foreign exchange market throughout yesterday. The GBP/EUR rate carried on its upward course, from 1.1349 at the open, to close at 1.1374, while the GBP/USD exchange rate pushed on slightly from the morning’s open at 1.6116 to close at 1.6123. There were no significant data releases from the UK yesterday, with the movements in the currency market, particularly against the Euro being attributed to the ongoing unresolved debt situation in Greece.

There is no economic data scheduled for release from the UK today either, but with plenty of market-moving figures primed for release from the Europe and the US, there could well be sharp movements in the exchange rates today.

One country; and its currency that has remained fairly unaffected by the problems in the world markets over the past year has been Australia, and the Australian Dollar. The currency has strengthened considerably across the board over the past 6 months, with the GBP/AUD rate currently trading at 1.5138; but the nation that has been seen by the market as ‘recession-proof’ is starting to show some signs of weakness. Despite a relatively low unemployment rate of 4.9%, and a currency that has strengthened by 21% against the US Dollar over the past year; languishing consumer spending across the country has led the market to speculate that the Reserve Bank of Australia may postpone their next interest-rate rise, by anything up to three months. With economists wary of the effect a fall-out in Europe could have on the country, where consumer spending accounts for around half the overall economy, the market will be watching any developments very closely.

The Euro has continued to suffer in the foreign exchange market, with negative sentiment towards the Euro-zone rapidly increasing by the day. Greece’s credit rating now stands at ‘CCC’ the lowest possible level; and with news agencies reporting that Italy could be the next country verging on default, despite a rate-hike from the ECB, the currency is weakening considerably. There have been stories in the morning’s UK papers that the Euro-zone could be set for a split, with the stronger member nations Germany and France set to distance themselves from the weaker member states, with the possibility of a two-tier Euro currency being mooted.

Today will see the results of European bank stress tests being published, and with the market predicting a negative outcome overall, the currency could weaken further, with Italian banks in particular being singled out as having dangerously low levels of capital, against what is deemed as some high-risk securities on their balance sheets.

The US Dollar has been weakening since the release of Fed Chairman Ben Bernanke’s semi-annual report to Congress on Wednesday. The EUR/USD rate has continued to fall, from yesterday’s open at 1.4198 down to 1.4162 by the market’s close. The economic data released from the US yesterday was also negative, with retail sales figures for June showing no improvement, holding flat at 0.2% amid expectations for a rise to 0.4%. Producer prices also fell, with the annual rate dropping from 7.3% down to 7.0%.

The US economic docket today does contain two high-level pieces of market data. CPI (inflation) figures for June will be released at 13:30, with the forecast for no change in the annual rate, and also the University of Michigan’s confidence survey will be published this afternoon; with the market poised to react to any positive or negative increase in the reading.

Mike Hood
KBRFX

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