Foreign Exchange Daily Market Update 18/08/11

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The Pound made good gains against the Euro, and soared against the US Dollar in the foreign exchange market yesterday. The GBP/EUR rate moved up from the morning’s open at 1.1420 to 1.1486 by the end of the day, with the GBP/USD exchange rate rising from 1.6434 up to 1.6577 by the close of the UK business day. The morning’s economic data from the UK however was not entirely positive; with the unemployment rate rising from 7.7% to 7.9%, the claimant count rate also increasing, from 4.8% to 4.9%, and jobless claims rising from 31,300 to 37,100 for the month of July. The minutes released from the Bank of England’s last policy meeting showed a complete majority vote of 9-0 in favour of keeping the base interest rate on hold, with the MPC stating that ‘’the slowing in world demand growth’’ contributed to their decision, and that despite the central bank expecting inflation to peak near 5.0% this year, weak economic growth will cause inflation to fall quicker than earlier anticipated. There was an indication though that the bank may be paying serious consideration to further quantitative easing should it be required.

This morning has seen the release of UK retail sales figures for July, with the index showing a drop from 0.2% down to -0.2% annually, and month-on-month from 1.0% down to 0.2%. The Pound did weaken slightly on the figure’s release.

The Euro lost ground against the Pound, but made some small gains against the US Dollar yesterday; the EUR/USD exchange rate picking up from 1.4390 in the morning, to 1.4431 by the day’s close. The economic docket from Europe yesterday showed that CPI (inflation) in the Euro-zone held steady, the overall annual rate stalling at 2.5%, with the core index reading falling slightly, from 1.6% to 1.2%. Despite the drop against the Pound, the gain against the US Dollar may be attributed to the increased market sentiment and media coverage in regards to the possibility of the US sliding back into recession.

There are no economic events of real note scheduled for Europe today, so the currency will be open to shifts in market sentiment, and news from the world’s other major economies.

The US Dollar fell heavily against the Pound, and also slid against the Euro yesterday. The currency is facing fierce pressure in the market, as many leading market experts are tipping the nation to fall back into recession. Despite an additional $600 billion being pumped into the US economy in the last 9 months, overall growth has been well down on the previous year, and with the labour market showing increased weakness; house prices falling, and mortgage applications down there are fears that the US may suffer a ‘double-dip’. Economic data released from the US yesterday showed that the producer price index rose annually, from 7.0% to 7.2%, and excluding food and energy; rose from 2.4% to 2.5%.

Today will see the release of quite a bit of data from the US. Existing home sales figures are set to cross the wires this afternoon, along with the latest Philadelphia Fed index reading. The main focus though is likely to be on the release of CPI inflation figures, with the market forecast for a slight drop in the overall level of price-growth, from 3.6% to 3.3%, but excluding food and energy a small rise is expected; from 1.6% to 1.7%. Increased inflation would but pressure on the Federal Reserve, who have already stated they will be keeping the base interest rate at the current level well into 2012, possibly 2013.

The Market Team @ KBRFX

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