Foreign Exchange Daily Market Update 19/09/11

The Pound finished last week lower against the Euro, but almost unchanged against the US Dollar in the foreign exchange market. The GBP/EUR exchange rate fell throughout the week, from 1.1651 at Monday’s open, down to 1.1455 by Friday’s close. The GBP/USD exchange rate however, opened at 1.5802 and closed at 1.5801 following some choppy trading which saw it range between 1.5883 and 1.5724. The big economic events of the week saw CPI (inflation) in the UK rise annually from 4.4% to 4.5%, and month-on-month from 0.0% to 0.6%. Jobless claims fell for the month of August, from 33,700 to 20,300 which was a positive sing for the UK’s labour market. The claimant count rate however, remained at 4.9%, and the overall ILO unemployment rate for the 3 months to July stayed at 7.9%.

This week is not overly heavy with UK economic news, but the data releases scheduled are of high market importance. Wednesday will see the release of the minutes form the Bank of England’s last policy meeting, and with a hint that there might be a slight shift in the voting numbers in regards to further asset purchasing, the market will be watching very closely for the all important majorities. The Pound could well react to any surprises in the accompanying statement from Governor Mervyn King, with traders keen to hear what the central banks outlook is for the coming months in terms of growth and inflation. Wednesday will also see the release of the latest public sector net borrowing and public finance figures; which will give an insight into how well the UK government are progressing with proposed budget cuts to try and improve the nation’s balance sheet. There are fears though; that vast cuts could be damaging to economic growth. Aside from Wednesday, the only major release will be Friday’s BBA loans for house purchases; with the market forecast for a slight decline in the number.

The Euro managed to regain some ground across the week, finishing higher against the Pound and the US Dollar in the currency exchange market. The EUR/USD exchange rate moved up from the week’s open at 1.3561 to trade up at 1.3791 by the week’s close, having reached a high of 1.3908 on Thursday. Economic data from Europe across the week was mixed; with industrial production figures showing good gains fro august, the annual level of activity increasing from 2.6% to 4.2%, and month-on-month from -0.8% to +1.0%. There was some worry though, with the European Central Bank’s (ECB) latest monthly report indicating that the central banks stance towards policy has become increasingly dovish, and it foresees increased downside risk to growth and inflation. The over-night index swaps market has indicated an increased market feeling that the ECB may cut interest rates before the end of the year. Euro-zone CPI (inflation) figures released last week showed that price growth held firm annually at 2.5%, but monthly rose from -0.6% to +0.2%.

The week ahead for Europe will see the latest producer price index figures for Germany released on Tuesday, along with ZEW economic sentiment survey results from Germany and the Euro-zone, with the Euro set to face choppy trading if there is any fall in the results. There is an indication that consumer sentiment may be increasing in negativity for Germany, with a firm public opinion that the nation is putting itself at risk by offering so much in terms of monetary support to countries like Greece. Thursday will be data heavy, with the release of PMI numbers for manufacturing, services, and the composite result from France, German and the Euro-zone combined. The currency will take direction from any surprises in the numbers, with the market forecast for an overall negative result. Thursday will also see the release of Euro-zone consumer confidence figures; with the expectation for a worse result than the previous month.

The US Dollar reversed a previous week of gains when it finished lower against the Euro and almost unchanged against the Pound last week. The currency which had benefited from increased negative risk across Europe, did slip somewhat; amid a very mixed week in terms of economic data and sentiment. Figures released from the US showed that advance retail sales for August fell heavily from 0.5% to 0.0%, with producer prices also dropping from 7.2% to 6.5%. CPI (inflation) showed an annual increase in price-growth from 3.6% to 3.8%, but industrial production took a downturn; from 0.9% to 0.2%. There was a surprise on Friday, with the University of Michigan confidence index showing an increase in positive sentiment, from a reading of 55.7 the previous month, up to 57.8 for September.

The US economic docket this week is fairly light in terms of data, with Tuesday set to see building permits and housing starts figures cross the wires. Wednesday will see the release of existing home sales figures, and the biggest data event of the week: the Federal Reserve’s latest interest rate decision. It is almost certain that there will be no change to the base rate; but the market is primed for any hints of further monetary stimulus (quantitative easing) which has been mooted over the past few weeks. The currency will take direction from any shift in policy or rhetoric; but with economic growth still in a fragile state, along with the nation's labour and housing markets, the central bank will have to be very careful with an potential policy moves.

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