Daily Foreign Exchange Market Update

Tue, February 14, 2012

The Pound closed out yesterday higher against the Euro, but lower versus the US Dollar in the foreign exchange market. The GBP/EUR exchange rate picked up from 1.1911 at the morning’s open, to trade up at 1.1942 by the close of the UK business day; with the GBP/USD exchange rate falling from 1.5817 at the morning’s open to trade down at 1.5779 by the day’s close. There was no significant economic data released from the UK yesterday, but it seems that the threat of a potential downgrade to the UK’s ‘AAA’ credit rating from ratings agency Moody’s has weighed heavily on the currency.

This morning has seen the release of January’s CPI (inflation) figures from the UK; with inflation falling to a 14-month low. The annual rate fell from 4.2% to 3.6%, and the month-on-month level showed the biggest drop in inflation since 2008. This is welcome news for both consumers and policy-makers alike; with the UK still in a fairly fragile economic state. A drop in prices could lead to increased consumer spending and also free up more cash in the real economy; which in turn could benefit the Pound.

The Euro fell against both the Pound and the US Dollar in the currency exchange market; despite the fact that Greece passed a crucial bailout vote to ensure it receives another tranche of funding, just weeks before it was due to make repayments on bonds. There has been severe unrest in Athens over the past week, with the Greek government having to make deep cuts in civil service jobs and the public sector overall, along with cuts to welfare and the minimum wage. Even though the nation will now receive further funding, it highlights the stark problems faced by many Euro-zone nations, and with ratings agency Moody’s cutting the credit ratings of Spain, Portugal and Italy; and indicating it may well look to strip the UK and France of their ‘AAA’ status, the currency has suffered as a result. The EUR/USD exchange rate fell sharply yesterday, from 1.3278 at the morning’s open, down to 1.3210 by the close of the European market session. There were no key economic data releases from Europe yesterday, but the combined market events and shift in sentiment were enough to send the single-currency lower.

Today will see the release of key ZEW economic sentiment index figures from Germany, and the Euro-zone overall; with the market expectation to see a marked improvement in the German figure, which could bring some small relief to the currency. The Euro-zone figure however, may not show any improvement, which for market participants will reinforce the clear line between the overall health and stability of the Euro-zone’s ‘stronger’ member states; and the rest.

The US Dollar benefitted from the ongoing turmoil and negative sentiment across Europe; by gaining against both the Euro and the Pound in the foreign exchange market yesterday. Like the UK, and the Euro-zone there were no key data releases from the US yesterday, but market sentiment saw the US dollar benefit from increasing worries over the debt debacle faced by mainland Europe, and the possibility of the UK losing its ‘gold-plated’ AAA rating.

Today will see the market focus on advance retails sales figures from the US, which are expected to see a sharp advance both annually and month-on-month. With consumer spending accounting for around two-thirds of all economic activity in the US; it is vital for the currency to see positive results from this figure.

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

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