Foreign Exchange Daily Market Update 05/09/11

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The Pound finished last week higher against the Euro but lower against the US Dollar in the foreign exchange market. Despite the GBP/EUR exchange rate falling down to a low of 1.1272 on Wednesday, the market closed on Friday with the rate back up at 1.1413. There was only a minimal amount of economic data released from the UK last week, with the overall feeling being slightly negative. Mortgage approvals for July showed a good increase from 48,500 to 49,200 but GfK consumer confidence levels for August showed yet another monthly decline from -30 to -31. PMI manufacturing for August also fell, from 49.4 to 49.0; further reinforcing the current fragile state of the UK’s manufacturing sector.

The week ahead doesn’t contain much more data than the previous week; but the importance of some of the figures set to be released are a lot higher. Thursday will most likely be the focal point of the week for the UK; with the NIESR releasing their latest GDP estimate for August. With economic growth fairly weak in the UK at the moment; should there be any drop below the market forecast for a level of around 0.6%, the Pound could come under severe pressure. Thursday will also see the Bank of England meet to decide on both the base interest rate, and also the asset purchase target. With the last set of minutes released showing more votes towards increasing the asset purchase target; the market will be watching closely to see if there is any hint of a shift towards further quantitative easing; a possibility that is becoming more likely month on month. In terms of the base interest rate; it almost a foregone conclusion that there will be no change, but the market will have to wait for the release of the meeting’s minutes to gain a true gauge of how strong the majority vote is, and also the bank’s current rhetoric.

The Euro faced strong headwinds last week, and fell against both the Pound and the US Dollar. The overall feel of the economic docket from Europe was negative; and may be considered more disappointing with the fact that a lot of weak data was from arguably the Euro-zone’s strongest member state; Germany. With only a minimal improvement in the unemployment change for August, and PMI manufacturing figures from Germany falling sharply, the market saw a shift in sentiment away from the Euro, as the worries of debt-contagion are still firmly in the minds of market traders. Euro-zone consumer confidence figures improved slightly, from -16.6 to -16.5 but still remained near its lowest levels for around three years. The final reading of 2nd quarter GDP from Germany showed no change from initial indications of 2.8%, which caused little reaction in the currency exchange market.

This week will see some high-level market data released from Europe. Tuesday sees the release of the final reading of Euro-zone 2nd quarter GDP; which could make waves in the market should there be any revision to the initial reading. German factory orders will cross the wires on Tuesday, and there is a worry that the currency could fall if there is a decline in the industry that is most key in terms of economic contribution to the German nation. Thursday’s release of German trade balance figures are expected to show a smaller trade surplus, which would indicate a decrease in the amount of export activity, and will stimulate some thoughts within the market that a strong currency may be affecting the international trading ability of the Euro-zone; which could have dire consequences in the long-term. The ECB are also meeting on Thursday; with the central bank expected to make no changes to the key interest rate; and unlike their UK counterparts, there is likely to be some market movement during the post-decision press conference; where ECB President Trichet is almost certain to face questions in regards to the ECB’s current bond purchasing plans, and also his outlook for inflation and economic growth in the coming months.

The US Dollar continued to benefit from its safe-haven status last week, as a combination of worsening sentiment and poor data from the UK and Europe helped the currency to make strong gains across the board. The EUR/USD exchange rate pulled back throughout the week from 1.4529 to 1.4196, a massive gain for the Dollar; which was no doubt helped by increases in personal spending, personal income, and factory orders; which suggested that despite fairly stagnant growth; there are some positive notes within the overall economy. One disappointment though was a huge fall in US consumer confidence for August; with the level plummeting from 59.2 to 44.5. the feeling still remains though that the Federal Reserve are likely to introduce a third round of quantitative easing in the next few months; which despite almost conceding the economy does need further stimulus, should help to increase growth and confidence in the nation.

There is not a large amount of data set for release from the US this week, but with Wednesday’s release of the Federal Reserve’s Beige Book economic survey, and Thursday trade balance data; there is likely to be some sharp movement within the currency markets should there be any unwanted surprises, or further indications of economic weakness.

This Daily Market Update is brought to you by The Market Team @ KBRFX – Exchange Rates & Foreign Currency Transfer specialists.