Foreign Exchange Daily Market Update 08/08/11

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The Pound gained against the Euro, but fell slightly against the US dollar in the foreign exchange market last week. The GBP/EUR rate moved up throughout the course of the week; from Monday’s open of 1.1426, reaching a high of 1.1568 late on Friday, to trade at 1.1518 at the close on Friday ; a good recovery from the week’s lowest point at 1.1364. The GBP/USD however fell throughout the week, from Monday’s open at 1.6441, down to 1.6356 by Friday, hitting a low of 1.6260. The main data events of the week from the UK saw PMI manufacturing and construction fall, from 51.4 to 49.1 and from 53.6 to 53.5 respectively. PMI services figures however, showed a slight improvement, with the level rising from 53.9 to 55.4. The Bank of England did meet during the week, but there was no change in either the base interest rate, or the asset purchase target; with the bank almost at an impasse in terms of policy. A rise in the base rate would be damaging to the housing market, and also economic growth, but any increase in asset purchasing could potentially stoke a rise in inflation.

The week ahead for the UK does contain plenty of high-level market data. Tuesday will see the release of July’s GDP estimate from the NIESR, and the market is not expecting any drastic jumps in growth; with any sort of positive figure set to be considered acceptable. There will also be figures released for industrial and manufacturing production on Tuesday, along with the latest view of the UK’s trade balance, with the market forecast for the negative trade deficit to decrease slightly, which could be positive for the Pound. Wednesday will see the release of nationwide consumer confidence figures, and also the Bank of England’s inflation report, with both events having the potential to move the currency exchange markets. With stock markets falling through the back end of last week, and riots across North London this weekend, consumer confidence may be affected, and could reflect negatively on the currency. A rise in inflation will not be welcome either, with the central bank almost having their hands ties in terms of policy.

The Euro fell across the week, amid news that Italy and Spain will require intervention from the ECB to try and raise extra capital through bond sales. The single currency fell against the US Dollar, the EUR/USD exchange rate dropping from Monday’s open of 1.4388 down to 1.4210 on Friday, with the week’s lowest point at 1.4054. The week’s economic events were not beneficial to the currency, with Euro-zone retail sales falling annually from 6.2% down to 5.9%, and the ECB keeping interest rates on hold. The accompanying press conference to the decision confirmed the stories that had been circulating in regards to the central bank purchasing securities to offset losses suffered in the markets, and this morning has seen that the ECB are focusing efforts on Spanish and Italian securities, with those two nations the most susceptible to default, along the same lines as Greece.

This week will see the European docket release some potentially market moving-data. Tuesday’s German trade balance figures could affect the currency, but with the nation renowned for its strong manufacturing industry, and high export levels it is more than likely we will see a positive result. Wednesday’s focus will turn to CPI (inflation) figures from Germany, with rate-hawks watching closely for any signs of increased price growth, which would give the green light for the ECB to implement another rate rise before the end of the year; which many analysts expect to happen. Thursday will see the release of the ECB’s monthly report for August, which will be closely watched for any shift in rhetoric, and the bank’s predictions for growth and inflation in the coming months. If there is any shift towards a rate hike before the turn of the year, expect to see the Euro appreciate despite the fact the ECB are actively involved in the bond markets to try and stabilise things.

The US Dollar clearly benefited from its safe-haven status last week, despite the last-minute rush to pass through a bill to prevent the nation defaulting. As European stock markets crashed, and the ECB had to intervene into buying securities, the US Dollar benefited, and started gaining across the board. Aside from congress passing the bill to raise the debt ceiling, it was mixed picture in terms of economic data, with ISM manufacturing for July falling, from 55.3 to 50.9, the ADP employment report showing a drop from the previous month’s level of 157,000 jobs added, down to 114,000. Friday finished on appositive note though, with non-farm payroll figures showing a sharp increase for the month, up to 117,000 from 46,000, and the overall US unemployment rate falling from 9.2% to 9.1%.

The week ahead is not data-heavy for the US, but has some very influential data. Following ratings agency Standard & poor’s cutting the US’s credit rating from AAA to AA+ over the weekend; the market will be watching to see how the nation responds. Tuesday will see the Federal Reserve’s interest rate decision meeting, and analyst’s will be hanging on to every word from Fed Chairman Ben Bernanke, for any indication into the current situation and future policy, with many market experts talking up the possibility of more quantitative easing at the start of next year. Wednesday will see the releases of the US’s monthly budget statement, with the week rounding off on Friday with Advance retail sales figures, and the University of Michigan confidence survey.

Mike Hood
KBRFX

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