Foreign Exchange Daily Market Update 21/07/11

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The Pound continued to push on against both the Euro and the US Dollar in the foreign exchange market yesterday. The GBP/EUR rate moved up from 1.1339 at the morning’s open, to trade at 1.1367 by the close. The GBP/USD rate also followed an upward trend, with the exchange rate rising from 1.6072 to 1.6142 throughout the day. This was despite the release of the Bank of England’s minutes from their last policy meeting, which showed no change at all in the voting patterns from policy-makers in regards to the base interest rate and the asset purchase target. The Pound was able to take advantage though, of the fact that both Europe and the US are facing problems in regards to burgeoning debt levels, with both economies struggling to find solutions to their relative issues.

This morning has already seen the release of Nationwide consumer confidence figures from the UK. The level did fall month on month, from 55 down to 51, but was better than the market forecast for a reading of 49. Later on this morning will see the release of public sector net borrowing figures, along with retail sales figures for June. The market forecast is for public borrowing to have fallen, which would be positive for the Pound, as it would show the UK government are keeping to their promise to reduce the UK’s debt burdens.

The Euro continued to fall against the Pound yesterday, but did gain small ground against the US Dollar yesterday. The EUR/USD rate pushed up to 1.4201 by the close of play, up from 1.4173 at the morning’s open. Economic data from Europe yesterday painted a negative picture for the economy; with German producer prices falling annually from 6.1% down to 5.6%, along with Euro-zone consumer confidence falling fro the month of July; the reading showing a drop from -10.3 to -11.4.

This morning we have seen the release of German PMI manufacturing for July, which fell from 54.6 to 52.1. Along with Euro-zone PMI figures for Manufacturing, Services, and the composite reading all falling for the month of July; the market has reacted negatively and the currency exchange market has seen the Euro weaken further. The market will turn its attention to a meeting of EU leaders today, where once again a solution will try to be reached for Greece; with European Commission president José Manuel Barroso putting out a stark warning that the existence of the Euro is at stake because of growing frustration at the top of the EU and IMF that national governments are dodging their responsibilities and endangering global economic stability. Barroso stated on Wednesday “Leaders need to come to the table saying what they can do and what they want to do and what they will do. Not what they can't do and won't do. This is what I ask from them’’. “All of our efforts are based on a strong single market and a strong euro. That is what is at stake. That is why we must provide a solution tomorrow (Thursday). I believe now is the time to decide.”

The US Dollar continued to face pressure in the foreign exchange market yesterday, with a solution still to be reached over raising the nation’s debt ceiling to prevent the US defaulting on its debt repayments, come August. The currency has been weakening, as the prospect of a default grows larger, with the potential for world financial markets to be deeply affected by such a scenario. Should the two parties fail to pass a bill through the house to reach a solution for the debt ceiling, the Dollar’s value could plummet as the demand for US Treasuries would shrink rapidly, along with increasing concern’s over the Dollar’s value as a reserve currency due to it’s volatility.

The US economic docket today will see the release of house price index figures for July, along with the Philadelphia Fed Index reading for July. Following yesterday’s drop in existing home sales, the house price index reading may well follow suit, with the market forecast for a drop from 0.8% to 0.1%. The Philly Fed reading is expected to show an increase, which would mean in improved outlook from the biggest manufacturing district in the US. This would be some welcome news for the US as increased production does contribute to economic growth.

Mike Hood
KBRFX

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