Foreign Exchange Daily Market Update 15/08/11

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The Pound ended last week lower against the Euro and the US Dollar in the foreign exchange market. The GBP/EUR rate opened on Monday at 1.1440, falling to a low of 1.1253 during the week before recovering to trade at 1.1436 by the close on Friday. The GBP/USD rate followed a similar pattern, opening at 1.462 on Monday, which was the highest point of the week; falling to 1.6110 before coming back to trade at 1.6280 by Friday’s close. The main economic events of last week in the UK saw industrial production rise, from -0.9% to -0.3%, manufacturing production fell; from 2.8% down to 2.1%, and the UK’s trade balance widened, from -£8.467 billion to -£8.873, reinforcing the nation’s reliance on imported goods and poor export levels. Wednesday saw the Bank of England release their latest inflation report, with the bank taking a very dovish stance towards policy. Governor Mervyn King indicated that he expects inflation to fall back below the bank’s target level of 2.00% in the medium-term, and that they have cut their growth forecasts because of weakness in the global economy, citing the Euro-zone debt crisis as a possible dampener to the UK’s economic prospects. Many market experts are now predicting that the bank may not start raising interest rates until well into 2012, and this could be a possible reason that the Pound lost ground against the Dollar.

The week ahead will see some high-level market data from the UK, with Tuesday seeing CPI (inflation) and retail price index figures cross the wires. Wednesday will be focused heavily on the release of the minutes from the Bank of England’s last policy meeting; with the currency exchange market almost certain to take direction from any shift in the central bank’s voting majorities or stance on monetary policy; alongside the release of the jobless claims change, and unemployment rate figures for July. Thursday will see the release of retail sales figures, with the market forecast for a drop in sales, which could be detrimental to the pound; as lower consumer spending can be an early indication of economic slowdown. The week will round off on Friday with the release of public finance figures and public net borrowing levels; which are both expected to see a sharp drop, courtesy of government cuts, which in a way will be welcomed as the UK tries to trim its balance sheet, but could have a detrimental effect to the overall economy.

The Euro did suffer in the market last week, ending lower against the US Dollar but regaining some of its earlier losses against the Pound. The week saw a fairly negative picture in terms of economic data from Europe; with Euro-zone investor confidence falling sharply from 5.3 to -13.5, Germany’s trade balance also fell, with the positive surplus contracting from 14.8 billion Euros to 12.7 billion. German CPI (inflation) held its annual level at 2.4%, and French 2nd quarter GDP fell drastically; the annual rate falling from 2.2% to 1.6%, and quarter-on-quarter from 0.9% to 0.0%. There was quite a big focus on the European Central Bank’s monthly report on Thursday; with the central bank indicating that that the last two rate-hikes; whilst questioned by some in the market were warranted, given the upside risks to price stability. The report enhances the bank’s stance towards inflation; that they aim to keep price-growth close to 2.0%, which in turn they believe will support economic growth and job creation in the Euro area. The rhetoric is that the bank will keep policy ‘accommodative’ to support its aims, and will ‘monitor very closely all developments with respect to upside risks to price stability’.

This week will see the release of German and Euro-zone GDP figures on Tuesday, with the market primed to pile further pressure on the Euro should growth levels stall; or even worse fall below current levels. Wednesday will see the release of Euro-zone CPI (inflation) figures, with the market forecast for no change in either the core or overall level, which would suggest that the ECB’s previous two rate-hikes have served to contain inflation. The week will conclude on Friday with the release of German producer price index levels, with the annual rate expected to fall from 5.6% down to 5.3%, and the monthly figure to have stalled at 0.1%, which will not be positive for the single-currency.

The US Dollar managed to show a positive gain against both the Pound and the Euro throughout last week. The EUR/USD rate showed a shift in positive sentiment towards the Dollar across the week, the exchange rate coming down from Monday’s open at 1.4356 to trade at 1.4235 by the close on Friday. During the week, the Dollar did suffer slightly, with the Federal Reserve keeping the base rate on hold, and indicating that it may not consider altering the rate until well into 2013. The monthly budget statement released on Wednesday showed that the US’s negative balance was reduced slightly, from -$165 billion to -$129.4 billion, a positive sing; but this was countered by Thursday’s trade balance figure showing an increase in the US’s trade deficit; from -$50.8 billion to -$53.1 billion. The week ended on a negative note, with the university of Michigan survey showing a sharp decline, from 63.7 down to 54.9.

The US economic docket this week will see some significant data, with Tuesday seeing building permits, housing starts, and industrial production all reporting. Wednesday will see Us producer price figures cross the wires, with the market forecast for no change in the current level of 7.0%. Thursday is a data-heavy day, with CPI (inflation) figures set to report, and the currency will be sure to take direction from an expected drop in price-growth. There will also be existing home sales figures released on Thursday, with no data set for release on Friday.

The Market Team @ KBRFX

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