Foreign Exchange Daily Market Update 16/06/11

The Pound ended the day with the rate practically unchanged against the Euro; at 1.1372, but considerably lower against the US Dollar, falling from 1.6368 at the open of the European market, down to just under 1.6200 at the close of play. The influential data on the UK’s economic docket yesterday was all labour-market related. The Office for National Statistics (ONS) reported that claimant count increased by 19,600 to 1.49 million in May. Analysts had expected a rise of 7,000 and the figure represents the biggest rise since July 2009. However, the jobless total fell by 88,000 in the three months to April to 2.43 million - its biggest drop since August 2000. The UK Government is hoping that private firms will create jobs as posts are cut in the public sector were given a boost with news that employment in the private sector increased by 104,000 in the first three months of the year to 23 million jobs. Annual earnings increased by 1.8% in the year to April, down by 0.6% on the previous month, largely because of lower growth in bonuses in private firms.

Foreign exchange traders looking at today’s UK economic docket will focus solely on retail sales, with levels forecast to drop both monthly and annually, from 1.1% to -0.6% and 2.8% down to 1.5% respectively. A growth in retail sales is traditionally considered a good indicator of increase in consumer demand, and consequently economic growth, so should the figures report lower as expected, it doesn’t provide a positive outlook for the UK economy, so the Pound may well come under pressure.

Europe continues to face pressure in the currency exchange market in light of the struggle to find a suitable solution for Greece. This saw the GBP/EUR exchange rate move drastically overnight, up from 1.1370 to peak at 1.1460 in the early hours of this morning. Even with the rate falling back slightly to 1.1420 currently, it makes it a lot cheaper for UK based consumers who are buying Euros. In regards to the potential Greek bail-out: it is a German-inspired plan that suggests a further cash reserve may be needed by the Greek government if the European Central Bank refuses to accept its downgraded bonds as collateral. Such a plan to rework Greece's debts could force Euro-zone countries to fork out billions of extra Euros to avoid economic collapse. The European Commission warned an extra 20 billion Euros could be needed. Protests have broken out in Greece as a 24-hour anti-austerity strike by the country's largest labour unions crippled public services.

Former IMF chief economist Raghuram Rajan’s comments may go some way to settle the market as he stated that restructuring of Greece's debt looked increasingly probable as Athens lacked the political will to carry out widespread privatizations of state assets and budget tightening. "If the debt restructuring happens in a way that banks and markets are prepared for, even if not publicly but at least privately, it is very well containable," he said. But there was a stark warning from Rajan, with him saying "A restructuring which happens because the dialogue breaks down will be more complicated because that would suggest that there will be implications for Ireland, for Portugal and so on, and that could be more problematic down the line."

The European economic docket will be focused on inflation today, with Consumer Price Index (CPI) figures set for release at 10:00. The data may well give the market some doubt that an imminent rate-hike by the ECB is necessary, as CPI is set to hold unchanged at 1.6% month-on-month, and the annual figure is set to drop slightly from 2.8% down to 2.7%. Even though a figure of 2.7% annually would be above the ECB’s target level, a drop may indicate that the rise in inflation is temporary; and will fall naturally over time, consequently not requiring a further tightening of monetary policy to contain it.

The US Dollar strengthened greatly against both the Pound and The Euro yesterday, making it more expensive for UK consumers who are buying Dollars. The Greenback was helped by figures that reported a jump in consumer prices, both monthly and annually. The fact that CPI rose to 3.6% annually, and up from 1.3% to 1.5& month-on-month shows that consumer demand in the US is increasing, and should the inflation figures start to rise too fast, it will put pressure on The Federal Reserve to look at tightening monetary policy to prevent price growth becoming damaging.

The economic docket from the US today is comprised mostly of low- to-medium level market data, which includes building permit figures, along with housing starts and initial jobless claims. Slight increases in any of these figures would provide support to the US Dollar, as it would show a positive contribution to the economic picture. One figure that will be watched closely by the market is the Philadelphia Fed survey, which focuses mainly on manufacturing. An increase, which is predicted by the market, would indicate a positive outlook from manufacturers, and could see increased production levels, which is positive for the Dollar.

Mike Hood
KBRFX

KBRFX Homepage
Twitter - KBRFX

Foreign Exchange Daily Market Update 24/05/11

The Pound fell against the Dollar and the Euro yesterday as foreign exchange traders scaled back their appetite for risk. The Bank of England's (BoE) Chief Economist, Spencer Dale, voiced his opinion on UK inflation in an interview yesterday with the Financial Times (FT). Dale stated that the BoE should raise interest rates gradually over the next two years as a means of combating inflation, and as such has been voting for a 25 basis point hike in the interest rate for the past 3 policy meetings, alongside fellow MPC member Martin Weale. Dale said in the FT - "I don't take lightly the impact this (possible rate hike) could have on some families. But I think the cost to our economy as a whole - were inflation to persist for longer and our credibility start to be eroded - would be even worse." Dale's statement does go some way to support the possibility of the BoE raising the interest rates at some point over the next 12 months, and this expectation could well provide some support for the Pound over the coming months.

April's Public Sector Borrowing and Public Finance figures headline the UK's economic docket today. Expectations call for government borrowing to fall from £16.4 billion to £4.4 billion, which would be a positive sign for the economy and in turn the Pound. So should the figure fall in line with estimates, expect to see the exchange rate improve.

A weakened outlook and sovereign debt fears continued to weigh on the Euro yesterday with the Dollar making early gains against the single currency. The Euro's decline was not helped by worse than expected readings for Euro-zone and German Purchasing Managers Indexes (PMI) for April. Germany's index readings for service and manufacturing based activity fell to 54.9 and 58.2 respectively, missing estimates for readings of 57.0 and 61.0. For the Euro-zone manufacturing activity slowed with a PMI of 54.8 down from 58.0 and service based activity slipped from a reading of 56.7 to 54.9, bringing the composite index down from 57.8 to 55.4. The outcome would suggest that the Euro-zone is suffering from the effects of a slowdown in the global economy.

The currency exchange market has already seen a heavy dose of European data this morning, the most influential of which being Germany's final revisions to first quarter GDP. The revision showed that the economy expanded at a rate of 1.5% quarter-on-quarter, which was in line with preliminary readings, while annually the economy had grown by 5.2%. Despite the economy growing as expected, the individual components of the GDP figure were mixed resulting in the Euro currency's decline upon release of the data. One note of worry was that private consumption, investment in construction, and domestic demand of German goods came in well below expectations.

On a more positive note, Germany's IFO business sentiment gauges came in higher than expected. The current assessment index showed that German business remained as confident as last month about present conditions, when the index edged up 0.4 to 121.4, while the outlook for the next 6 months remains relatively weak with the future expectations gauge slipping slightly from 107.7 to 107.4. Lastly, new industrial orders in the Euro-zone are expected to have contracted in the month of March by 1.1% sequentially from February's 0.5% reading. Like yesterday's manufacturing PMIs, the decline of industrial orders points suggests that the slow down in the global economy is affecting the Euro-zone.

Falling risk sentiment boosted the Dollar's standing against the other majors yesterday, as it benefited from its status as a safe haven currency. The fall in risk appetite has been stoked by the sovereign debt crisis in the Euro-zone and perhaps more importantly, by the economic slowdown in China. As the world's second largest economy, China is considered very important in gauging the health of the global economy. News overnight showed that China is set to miss GDP estimates for 2011 as Premier Win Jiabao's campaign to rein in inflation is restraining growth in the economy. Published in today's Economic Information Daily were comments from government researcher Ba Shusong saying he's "concerned about a policy over-adjustment" as "China's economy faces a risk of an excessive downturn" if the central bank's tightening measures last too long.

Housing data from the US makes an appearance on the economic calendar today. The sale of new homes in April is expected to rise by 1.7% to bring the annual total to 305,000 units sold from 300,000. However, given that last week saw existing home sales slump over the same period and both building permits and housing starts contract, the possibility that new home sales will fall below expectations is very real. If the outcome comes inline with analysts' expectations then the Greenback is likely to find support, however if the figure falls below the consensus then the currency could see potential weakness.