Foreign Exchange Daily Market Update 18/07/11

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The Pound gained impressively against the Euro and the US Dollar in the foreign exchange market last week. The GBP/EUR rate moved up from 1.1293 on Monday; to trade at 1.1412 by the close of business on Friday, the exchange rate hitting a high of 1.1429 on Tuesday. The GBP/USD exchange rate also showed gains across the week; from Monday’s open at 1.5970, the rate moved up to trade at 1.6145 by Friday’s close. The economic data from the UK during the week wasn’t overly positive though, with CPI (inflation) figures showing a drop in the level of inflation, both monthly and annually, which takes pressure off the Bank of England to look at raising the base-rate anytime soon, as elevated price-growth is easing of its own accord. The UK’s visible trade balance for May also increased its negative deficit, reinforcing the nation’s over-reliance on imported goods; the negative balance increasing from -£7,643,000 to -£8,478,000. The labour market is also showing little sign of improvement, with the unemployment rate remaining unchanged at 7.7%, along with the claimant count rate remaining at 4.7%. There was some negative news though, with jobless claims for June increasing from 22,500 to 24,500 amid expectations for a drop in the number of new claims.

The week ahead for the UK is not data-heavy, but will have some high-level market data. Wednesday will see the release of the Bank of England’s minutes form their last policy meeting. The market will be looking for any rhetoric from policy-makers in regards to future policy, and also the all important voting numbers will be studied, to see if any of the committee sees fit to either increase the asset purchase target, or a need to increase the base interest rate. Amid last weeks falling inflation figures, it seems increasingly unlikely that the central bank have any room to start tightening policy, with a rate-hike having the potential to destroy an already weak housing and labour market. Thursday will see the release of public sector net borrowing figures, with the foreign exchange market likely to show a deep interest in whether the UK government are keeping to their promise of reducing the UK’s debt level and evening up the balance sheet. However, any cuts must be made sensibly as not to effect overall economic growth in the UK.

The Euro weakened considerably against the Pound throughout last week, and also dropped massively against the US Dollar before recovering slightly by the end of the week. The EUR/USD rate opened on Monday at 1.4140, falling to 1.3845 on Tuesday before coming back steadily to trade at 1.4147 by Friday’s close. The currency was not helped by the fact that Greece’s credit rating was cut to ‘CCC’; the lowest level possible, and also European bank stress test results showing that 8 of 90 banks tested by the European Banking Authority conclusively failed the tests for required capital levels and exposure to sovereign debt. Economic data released throughout the week also showed that Euro-zone industrial production fell in June, from an annual rate of 5.3% down to 4.0. CPI (inflation) figures also showed no price growth in the annual or monthly rate, following a rate-hike by the ECB at their last policy meeting. With inflation seemingly under control, it does not bode well for the Euro-zone, as the European market will continue to face fierce pressure over the coming week.

The week ahead will see some high-level market data, starting on Tuesday with the German ZEW economic sentiment survey; with any negative downturn in this reading likely to put pressure on the currency. Wednesday will see the release of German producer price figures, along with Euro-zone consumer confidence, which has the potential to affect the market hugely. Thursday and Friday also have influential data set for release, with German and Euro-zone PMI figures set to cross the wires, along with German IFO readings for business climate, current assessment, and expectations, along with Euro-zone industrial new orders figures.

The US Dollar came under considerable pressure last week; with Congress still yet to agree on an increase to the US’s debt ceiling, which if unresolved could see the US default on debt repayments due for August 4th. This would have drastic consequences on the market, and potentially the US currency, with ratings agency’s confirming that they would cut the US’s credit rating should a default occur. The economic data released from the US last week painted a fairly mixed picture of the overall economy. Figures showed that the US’s negative trade balance increased, from -$43.6billion to -$50.2billion, along with PPI levels dropping, from 7.3% down to 7.0%. CPI (inflation) figures showed no increase in the annual rate of 3.6%. The Dollar was further pressured on Friday, with the highly-influential University of Michigan confidence survey showing a drastic drop, from the previous reading of 71.5, down to 63.8. This figure is considered to be a good early indicator of any economic downturn in the US, with the currency exchange market reacting accordingly upon release, with the Dollar weakening.

The US economic docket this week will mostly focus on the housing market. Tuesday will see housing starts figures released along with building permits figures for June. Wednesday will see existing home sales figures released, with the market forecast for a rapid increase in the level of sales, which would be positive news for the housing market and the overall economy. Thursday will see house price index figures for June released, along with the Philadelphia Fed Index which will give a good insight into the manufacturing sector in the US. A higher reading from the Philadelphia Fed index indicates a positive outlook for the manufacturing sector, contributing to overall economic growth, so could be beneficial for the currency.

Mike Hood
KBRFX

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