Foreign Exchange Daily Market Update 25/07/11

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The Pound ended the week lower against the Euro, but higher against the US Dollar in the foreign exchange market. The GBP/EUR rate fell from 1.1461 on Monday, to trade at 1.1363 by Friday’s close. The GBP/USD exchange rate though, moved up throughout the week, from 1.6099 on Monday to trade up at 1.6309 by the end of the week. The Pound didn’t really receive any boosts from the economic data that was released during the week. The main data-event was Wednesday’s release of the Bank of England’s minutes from their last policy meeting; which showed no change in the voting for either the base interest rate or the asset purchase target to change, with the central bank being seen as having no alternative to change monetary policy for fear of damaging the economy. Thursday saw some negative news with Nationwide consumer confidence falling from the previous month’s reading of 55 down to 51, along with Public finance figures showing that the amount of money diverted by the government into the public sector increased from 11.3 billion pounds to 21.0 billion pounds. Some positive news however was that public sector net borrowing fell, from 14.6 billion pounds down to 12.0 billion pounds, and retail sales also increased, the annual rate rising from -0.2% up to 0.2%.

The week ahead will see the market focus on Tuesday’s release of 2nd quarter GDP figures, with the annual rate set to fall from 1.6% down to 0.8%, and the quarterly level from 0.5% to 0.2%; which would not be positive news for the UK economy, and will put pressure on both the UK government and the Bank of England to try and stimulate some growth in the economy to prevent a slip back into continuous negative growth. Wednesday and Thursday will be focused on figure releases from the Confederation of British Industry (CBI), with business optimism figures along with July’s reported sales figures set to cross the wires. The currency could well take direction from any upturn in the levels, which would be positive for the overall economic picture. Friday will see GfK consumer confidence figures released, along with mortgage approvals and net consumer credit figures; with the currency exchange market poised to see the possibility of the Pound appreciate, should the figures come in line with, or slightly above market expectations.

The Euro did regain some ground against the Pound, and also managed to surge against the US Dollar last week. The EUR/USD rate moved up across the week, from Monday’s open at 1.4045, to trade up at 1.4351 by Friday’s close. Barring the news that EU ministers agreed to a re-structuring of Greece’s debt on Thursday, all the economic data released form the Euro-zone throughout the week was negative. German producer prices fell annually from 6.1% down to 5.6%, Euro-zone consumer confidence also fell – from -10.3 to -11.4. On Thursday, figures showed a string on disappointments in regards to PMI levels, with German and Euro-zone PMI manufacturing, and services both falling for the month of July. This stream of negative data continued through Friday, with German IFO business climate levels, current assessment, and expectation figures all falling, way below market expectations. However; the resolution agreed for Greece’s debt re-structuring was positive enough to turn the market despite all the negative economic indicators, and the currency managed to find strength toward the end of the week.

This week will see little news from Europe until Wednesday; when the market will look to German CPI (inflation) figures, with the market expecting no change in the annual rate of 2.4%; but a small increase in the monthly level from 0.1% to 0.3% which would be beneficial for the Euro. Thursday will see the release of German unemployment change figures, and also the unemployment rate. With the labour market in Germany staying fairly robust, should there be any disappointments to the downside, expect to see the currency weaken. Friday will close off the week with German retail sales figures, and Euro-zone CPI (inflation) estimates for July; a boost in retails sales may not be enough on it’s own to trigger any upsurge in the currency, but a rise in CPI could be worrying for the economy, as the ECB have already risen rates twice this year to control inflation, but should the rise continue, it would press the ECB into further tightening which could cause problems for the economy.

The US Dollar continued to weaken across the board last week; with a solution still yet to be reached for raising the debt ceiling in the US to prevent the nation defaulting on debt repayments that are due at the start of August. Despite a lot of positive economic data from the US last week, with housing starts and building permits increasing for the month of June, along with the Philadelphia Fed Index soaring from a previously negative reading of -7.7 to a positive 3.2; the currency was rocked by the possibility of a default approaching, and should this happen – ratings agencies will be sure to cut the nation’s credit rating which would then hugely devalue US treasury bonds.

The week ahead will see some high-level data releases, mainly Tuesday’s US consumer confidence figures, along with Wednesday’s release of the Fed’s beige book report, and notably Fridays release of US 2nd quarter GDP figures. The currency will be almost certain to react to any positive upturns in any of these data releases, but the key issue still remains that Congress need to find a solution to raise the US’s debt ceiling in the next week or so; otherwise there could be dire consequences. Should the value of US treasuries drop, and also the US Dollar, the possibility is that large holders of US treasuries and currency; like China, may well look to sell the assets they hold and look for currency/paper with a lower level of risk.

Mike Hood
KBRFX

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