Foreign Exchange Daily Market Update 22/08/11

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The Pound finished last week decidedly higher against both the Euro and the US Dollar in the foreign exchange market. The GBP/EUR exchange rate which opened on Monday at 1.1385 fell to a low of 1.1324 on Monday afternoon, before soaring to a high of 1.1554 on Friday morning, before settling at 1.1484 by the close on Friday. The GBP/USD exchange rate followed a similar pattern, opening at 1.6292, which was near the low of the week at 1.6280 on Monday morning, before reversing throughout the week to break 1.6613 on Friday afternoon, closing at 1.6552.

The economic data released from the UK was quite mixed; with Tuesday seeing CPI (inflation) figures showing a small rise, both annually, from 4.2% to 4.4%, and month-on-month from -.01% to 0.0%. Wednesday was not so positive though, with jobless claims increasing from 31,300 to 37,100 for the month, the claimant count rate rising from 4.8% to 4.9%, and the overall unemployment rate in the UK increasing from 7.7% to 7.9%. Wednesday morning also saw the release of the minutes from the Bank of England’s last policy meeting which 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. The UK’s economic docket rounded off on Thursday with disappointing retail sales figures; the annual rate slowing from 0.2% to -0.2%, and monthly from 1.0% to 0.2%.

This coming week is not overly data heavy in terms of UK economic data. Tuesday will see the release of BBA loans for house purchase figures for July, with the market forecast for a slight increase in the number of loans approved. Thursday will also turn the spotlight onto the housing market; with the release of Nationwide house prices; which showed a negative contraction last month. Friday is the biggest risk event of the week for the UK, with the release of 2nd quarter GDP figures. The currency exchange market will be primed to react to any deviation in the expected levels of 0.2% growth quarterly, and 0.7% annually, with any downside disappointment having the potential to weaken the Pound.

The Euro did gain some ground against the US Dollar last week, despite making heavy losses versus the Pound. The EUR/USD rate which opened on Monday at 1.4309, picked up to a high of 1.4517 on Wednesday before falling down to the week’s low of 1.4258 on Friday morning, recovering to trade at 1.4410 by the market close on Friday.

The overall tone from the European economic docket last week was negative; with Tuesday’s German and Euro-zone combined 2nd quarter GDP figures showing a sharp drop in growth. The German annual n.s.a. rate fell from 5.0% to 2.8%, the annual w.d.a. rate from 4.7% to 2.7%, and quarterly from 1.3% to 0.1%. The Euro-zone combined result was also lower, with the annual rate falling from 2.5% to 1.7%, and quarterly from 0.8% to 0.2%. Wednesday saw Euro-zone CPI (inflation) figures cross the wires; and the result was a fall in inflationary pressure. The annual level held at 2.5%, while the monthly level fell from 0.0% to -0.6%, which takes pressure off the ECB to look at raising rates anytime soon. The European docket rounded off on Friday with German producer prices showing an increase, both annually and monthly, from 5.6% to 5.8%, and 0.1% to 0.7% respectively.

The week ahead for Europe does contain a fair amount of economic data. Tuesday will see the release of German and Euro-zone ZEW economic sentiment survey results, with the market forecast for an increase in negative sentiment based on the current debt woes and weak market conditions across Europe. Wednesday will focus on PMI figures, again from Germany and the Euro-zone combined. The expectation is for manufacturing, services, and the composite figure to all show declines for the month of August; which would not be beneficial for the currency. Wednesday will also see the release of German IFO business climate, current assessment, and expectations surveys, which will give some insight into business sentiment for the nation. The week will conclude on Friday with German producer prices figures, which are expected to show an increase, both annually and monthly.

The US Dollar continued to suffer last week in the foreign exchange market, as the increased media speculation that one of the world’s biggest economies could be heading back into recession put huge pressure on the currency and US markets.

The economic docket from the US last week was pretty mixed. Monday saw a sharp drop in Net long-term TIC flows (the amount of funds flowing into the US for stocks/bonds/securities), from 24.2 billion dollars, down to 3.7 billion; which isn’t really a surprise following the nations credit rating cut. Tuesday saw a downturn in building permits and housing starts, but an increase in industrial production. Wednesday saw price pressures increase, with PPI figures showing an increase annually from 7.0% to 7.2%, and from 2.4% to 2.5%. Thursday’s market focus was on inflation, with CPI figures showing a slight increase in price growth annually (excluding food & energy) from 2.4% to 2.5%, but the overall level holding steady at 3.6%. There was some disappointment on Thursday, with existing home sales showing a drop, from 4.84 million sales, down to 4.67 million, which highlighted the weakness in the US housing market.

This week’s US economic docket will kick-off on Tuesday with new home sales figures; the market forecast for an increase from 312,000 to 315,000. Wednesday will see the release of durable goods orders, which are also expected to see an increase, so the US dollar could well benefit from increased fundamental positivity. Friday will be a major day fro the US, with the release of 2nd quarter GDP figures, as well as Federal Reserve Chairman Ben Bernanke speaking at Jackson Hole; where many analysts are predicting that he will announce a further round of monetary stimulus/quantitative easing to try and boost the economy (QE3), as the US is currently facing a glum outlook.

The Market Team @ KBRFX

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