Daily Foreign Exchange Market Update

Fri, July 08, 2011

The Pound fell back, and lost its gains against the Euro and the US Dollar in the foreign exchange market yesterday. The GBP/EUR rate came down from the morning’s levels of 1.1195 to trade at 1.1126 by the close, a drop that will not be well received by people buying Euros. The GBP/USD rate also fell throughout the day; the exchange rate dropping from 1.6005 early on, to trade at levels of 1.5958 by the end of the UK business day. The UK’s economic calendar saw Industrial Production and Manufacturing production rise annually, from -12% to -0.8%, and from 1.2% up to 2.8% respectively. The market did focus though on the Bank of England’s interest rate meeting. As expected, there was no change in either the base rate or the asset purchase target. The Bank of England is in a tough position right now. A rise in rates could damage the housing market and make a large proportion of the UK population insolvent; while increasing the amount of asset purchasing could see a rise in inflation, which would put pressure on the Bank to raise rates to control it. It seems all the Bank of England can do at the moment is to sit tight, and it could be that the market’s response to the inability of the central bank to take action has weakened the Pound.

Today will see the UK release annual Producer Price Index figures for input and output, with the market forecasting a rise in both the figures. Should the figures come in line with expectations, it will be a good measure of rising UK inflation; with rising producer prices almost certainly to be passed onto consumer through retail prices.

The Euro strengthened considerably against the Pound and the US Dollar yesterday, as the ECB continued to press on with raising rates. The bank raised the base rate from 1.25% up to 1.5%, despite the ongoing troubles in Greece and Portugal. However, the European Central Bank’s sole responsibility is to control inflation across the Euro-zone, and with current levels operating almost 0.7% above the bank’s target of 2.0%, their decision based solely on this is justified. That does not mean though, that there may be damaging effects across Europe in terms of increased borrowing costs to consumers and businesses. The economic docket from Europe did show yesterday that German industrial production rose month-on-month, the figure coming in at 1.2%, up from the previous months level of 0.8%.

This morning has already seen the release of German Trade Balance figures, which cam in at 14.8 billion Euros, up from the previous months reading of 10.8 billion. A bigger trade surplus is positive for the country, as it shows more funds coming in to the country for exports than going out for imports. With a country that has such a robust manufacturing industry such as Germany, a reinforcement of its strength will most certainly boost the Euro.

The US Dollar gained against the Pound but fell against the Euro yesterday. The EUR/USD rate moved up from 1.4295 to 1.4336 by the end of the day, with the Dollar weakening off against the Euro. There was some positive news from the US labour market though, with the ADP employment figures showing an upturn from 36,000 to 157,000, smashing analyst’s estimates for 70,000 jobs added.

Today is also labour market focused in the US, with the release of the US unemployment rate, and also the market-moving Non-farm payroll figures. Yesterday’s massive gains in the ADP employment figures has seen the currency exchange market hoping for a similar result from the non-farm payroll figures. However, the figure is renowned for producing surprises, and the exchange rates may fluctuate if there is a big difference either side.

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