Foreign Exchange Daily Market Update 04/07/11

The Pound finished the week a lot lower against the Euro, but slightly higher against the US Dollar in the foreign exchange market. The GBP/EUR rate slipped from 1.1270 on Monday to trade at levels close to 1.1069 by the close on Friday, recovering slightly from a fall to 1.1008 in the earl hours of Friday morning; not good news for people buying Euros. The GBP/USD rate closed the week higher, at 1.6068 on Friday afternoon, up from the levels close to 1.5930 on Monday morning’ the rise in the rate being welcome news for consumers who are buying Dollars. Slight drops during the week for the Pound were not helped by the final reading of 1st quarter GDP showing that the annualised growth rate was revised downwards, from 1.8% to 1.6%, along with PMI manufacturing figures showing a slowdown in the sector, from a reading of 52.1 down to 51.3. Some positive notes were a slight increase in mortgage approvals, from 45,400 to 45,900 and also a small rise in house prices as surveyed by Nationwide, from -1.2% up to -1.1%.

The week ahead does contain some high-level market data from the UK, particularly Thursday’s Bank of England interest rate and asset purchase decision. While the market is expecting no change in either figure, any issued rhetoric form the bank could well affect the market, but any press comment is unlikely; with traders having to wait for the release of the banks minutes in due course for any viable commentary. Friday will be a big day for the currency exchange market as well, with the release of June’s GDP estimate from the National Institute for Economic and Social Research (NIESR). The growth rate is expected to be forecast at 0.4%, which would be down on the official final reading for the 1st quarter of this year, but is still a sign of growth nonetheless. Any drops below this predicated level could see the Pound weaken, as an economic slowdown will be detrimental to the value of the currency.

The Euro managed to find considerable strength against the US Dollar throughout last week, and gained well versus the Pound. The EUR/USD rate moved up to 1.4507 by Friday, after opening the week down at 1.4132. The market did take heart from the Greek Parliament passing a bill to implement medium-term austerity measures, which will help them gain access to funding from the IMF to prevent a default. German consumer confidence figures also showed an improvement in sentiment, along with the German labour market holding firm; the unemployment rate not dropping from the current level of 7.0%.

This week’s European economic calendar; like the UK’s, will contain an interest rate decision from the ECB. However, unlike the BoE, the ECB is widely expected to raise interest rates once again, up to 1.5% from the current level of 1.25%; which would be a bold move by policy-makers, and by all rights should help boost the strength of the Euro within the foreign exchange market. It could have a detrimental knock-on effect within Europe though, as a higher rate could see member states with heavy borrowing levels pushed to the limit in terms of repayments; something that official will be heavily aware of. Away from the ECB decision, the market will be looking to the release of Euro-zone retail sales figures on Tuesday, German factory orders on Wednesday, and German trade balance figures on Friday. With the first two releases expected to record drops, the Euro could come under pressure.

The US Dollar lost ground against both the other major currencies last week; with the economic calendar providing no support for the currency. Personal spending figures showed a drop in levels, from 0.3% to 0.0%, US consumer confidence also dropped significantly, from 61.7 down to 58.5; well below market forecasts. Also, the widely-regarded University of Michigan confidence survey which was released on Friday, showed a drop from 71.8 to 71.5, below analysts’ estimates, and may be considered by the market as an early indication of a slight economic slowdown in the US.

The US economic docket for this week could see the currency make big moves. There will be no data released on Monday, due to the US non-trading day for the 4th of July holiday. Tuesday will see factory orders figures released, with the market expecting a drop in levels. ISM non-manufacturing figures will report on Wednesday, with levels expected to drop as well, so the potential early in the week is for the US dollar to weaken. Thursday and Friday will focus on the US labour market; with Thursday seeing the release of the ADP unemployment change figures, and Friday seeing the release of the highly-volatile Non-Farm payroll figures along with the current US unemployment rate. The overall unemployment rate is forecast to stay at 9.1%, and non-farms are set to show an increase from 54,000 up to 89,000. The figure is prone though to produce big surprises, so expect the currency market to see some sharp movement on Friday afternoon.

Mike Hood
KBRFX