Daily Foreign Exchange Market Update

Mon, August 01, 2011

The Pound finished last week higher against both the Euro and the US Dollar in the foreign exchange market. The GBP/EUR rate picked up throughout the week, from Monday’s open at 1.1346 to close on Friday trading up at 1.1425. The GBP/USD exchange rate followed a similar pattern as well, with the rate on Monday of 1.6292 rising across the week to levels of 1.6454 on Friday. The week’s economic data was fairly positive for the UK, the main highlights being Monday’s BBA loans for house purchase figures rising beyond forecasts, and Tuesday’s 2^nd quarter GDP reading coming in line with estimates amid fears of a bigger drop in growth; which would have been hugely detrimental for the currency. The week rounded off on Friday with some more positive figures, with mortgage approvals rising by 2,000 for the month of July, and Net consumer credit figures also showing an increase.

The week ahead will be mainly interest rate focused; Thursday’s Bank of England meeting is expected to see no change in either the base rate or asset purchase target; but it is the rhetoric that will be watched closely, with many analysts feeling the BoE has no other option but to sit tight. Any sense of helplessness on the part of the BoE could be detrimental to the currency; but it may well be that the market will wait for the release of the minutes before the currency exchange market is deeply affected. We will see PMI figures for manufacturing, construction and services this week; with the three readings to be released on Monday, Tuesday, and Wednesday respectively; with Friday rounding off with PPI output figures for July.

The Euro did weaken against the Pound but made a small gain against the US Dollar last week; the EUR/USD rate moving slightly from Monday’s open at 1.4359 to trade at 1.4398 by Friday’s close; the Euro rallying back from a mid-week low of 1.4228. The pressure on the currency did ease slightly with a restructuring agreed for Greece’s debt; but news has begun to filter through that Spain could be the next country in line to seek additional funding or restructuring to prevent risk of default. The market data released from Europe during the past week was fairly mixed; German CPI rising annually from 2.4% to 2.6%, but the unemployment change showing a negative change, from -8,000 jobs to -11,000 jobs. German retail sales also fell, from 3.1% to -1.0%, but the figure was above expectations so the currency did not suffer as much.

The European economic docket this week will see Euro-zone PPI figures released on Tuesday; Euro-zone retail sales on Wednesday, and German factory orders on Thursday; but the biggest event will be Thursday’s ECB interest rate decision. Whilst no change is expected in the base rate; as always the focus will turn to the following press conference and the currency will react to any change or reinforcement of rhetoric from the ECB’s president - Trichet. The week will finish off with German industrial production figures on Friday.

The US Dollar continued to suffer throughout last week, as the ongoing scenario of the nation defaulting weighed on the currency and bond markets. Economic data was fairly mixed, with consumer confidence rising on Tuesday; but durable good orders falling heavily on Wednesday. Friday was a negative day overall; with the Chicago purchasing managers index falling from 61.1 to 58.8, and the University of Michigan index also coming lower, from 63.8 to 63.7. 2nd quarter GDP figures showed a rise in the annual growth rate, from 0.4% to 1.3%, but way below forecasts of a figure of 1.8%. Quarterly though; the growth rate exceeded market expectations of a 2.0% reading, and reported at a level of 2.3%.

This week will see plenty of high-level market data from the US, amid the news that Congress are set to vote on a plan that will increase the US’s debt ceiling and prevent it defaulting. A plan has been put together; with President Obama confident of house approval, and this will go some way to settle the market, with the SU Dollar showing a slight appreciation already this morning. Today will se the release of ISM manufacturing figures, and construction spending figures; which will give some insight into the health of two very important sectors in the overall economy. Tuesday will focus on personal income and spending figures, with the results key to any future growth in the economy, and could reflect on retail sales results also. Wednesday sees the labour market come under close scrutiny, with the ADP employment change figures set to report a slight drop, which would weaken the currency ahead of Friday’s often-surprising Non-farm payroll report. The Non-farm figures traditionally stray from market estimates, and the US Dollar could see sharp movements off the back of any surprises.

Data Releases