Foreign Exchange Daily Market Update 10/08/11

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The Pound fell against both the Euro and the US Dollar in the foreign exchange market yesterday. The GBP/EUR exchange rate dropped throughout the day, from 1.1519 in the morning, down to 1.1371 by the day’s close. The GBP/USD rate followed a similar pattern, with the morning’s open at 1.6364 sliding down to 1.6195 by the end of the day. Economic data released from the UK yesterday was not positive, despite figures showing that industrial production rose annually, from -0.9% to -0.3%; the overall picture was negative, with manufacturing production falling from 2.8% to 2.1%, and the UK negative trade balance deficit increasing from £8.467 billion to £8.873 billion.

Today, the UK market will focus solely on the Bank of England’s inflation report. The central bank is in a position at the moment where raising rates could be damaging to the economy, and the market is expecting to see the report reinforce the bank’s consistent view that the current inflation level is partly caused by commodity prices and will fall gradually over time. With a rate-hike in the UK looking a long way off, this could explain some of the losses the Pound suffered throughout yesterday, so there may be a small rally should the report make any comment towards sustained rises in inflation, which could force the bank into taking action.

The Euro strengthened against the Pound and the US Dollar yesterday. The EUR/USD rate moved up slightly from the morning’s open of 1.4207, up to 1.4242 by the close. The European economic data released yesterday showed that German’s positive trade surplus fell, from €14.8 billion down to €12.7 billion; which shows that export activity has fallen, and importing has increased. With the nation being such a strong industrial and manufacturing nation, this does cast some doubts on the health of those particular sectors.

This morning we have already seen the release of German CPI (inflation) figures, with the annual price-growth rate holding at 2.4%, still slightly above the European Central Bank’s (ECB) target; but crucially for the market, not increasing. This may indicate that the ECB’s two rate-hikes this year, are working to curb inflation across the Euro-zone.

The Dollar strengthened against the Pound, but fell slightly against the Euro yesterday. The Federal Reserve kept the nations base interest rate on hold at their meeting last night, but the decision was not without some startling comment from the central bank. The Fed warned that economic growth this year has been ‘considerably slower’ than it had expected, and the market is looking at the possibility of the nation falling back into recession. Many analysts expected to see the Fed announce some form of stimulus package to help kick-start growth, but there were no indications towards any policy of this nature, with the mood of the Federal Reserve being seen as increasingly dovish.

Today will see the release of the US’s monthly budget statement; which will give an insight into current spending levels, and also the amount of Government borrowing the US is taking on. The currency exchange market could well react as the market digests the figures, with the possibility of a bad US balance sheet affecting sentiment towards the US Dollar.

Mike Hood
KBRFX

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