Daily Foreign Exchange Market Update

Fri, August 05, 2011

The Pound made good advances against the Euro, but fell against the US Dollar in the foreign exchange market yesterday. The GBP/EUR rate moved up throughout the day, from 1.1469 to 1.1514 by the day’s close. The GBP/USD exchange rate however, fell; from 1.6357 at the morning’s open, down to 1.6303 by the end of the day. The main economic event in the UK yesterday was the Bank of England’s latest interest rate decision, and as expected there was no change to either the base rate, or the bank’s asset purchasing target. The market showed hardly any instant reaction, and it was left to bigger news from Europe to affect the currency’s movement.

Today will see PPI output figures released form the UK, with the forecast for the core level to hold at 3.2%, but the n.s.a figure to show a slight improvement from 5.7% to 5.8%. The core index figure is usually a better gauge of inflation, and the Bank of England will welcome a figure that shows no increase in inflationary pressures; but the currency exchange market may not view stagnant price growth as positive, as it lessens the chance of an interest rate-hike.

The Euro fell against both the Pound and the US Dollar yesterday, the EUR/USD rate dropping from 1.4259 down to 1.4157 throughout the day. The currency was not helped by the fact that ECB President Trichet may be forced into buying Spanish and Italian securities to try and fight against the debt contagion problem throughout the Euro-zone. At yesterday’s policy meeting, the ECB kept the base rate on hold, but with Italy and Spain’s economies seen by the market as ‘’too big to bail’’ President Trichet indicated that the bank will be purchasing bonds to try and calm the markets worries that have now diverted away from the US, towards Europe. Stock markets fell throughout Europe yesterday and also opened with losses this morning.

The European economic docket today will see the release of German industrial production figures, with the annual level set to rise from 7.6% to 8.1%, but the monthly output is expected to fall from 1.2% to 0.0%, which may not be positive for the currency, as continued lower production could lead to a slowdown in economic growth.

The US Dollar seemed to benefit from the turmoil in Europe yesterday, as it showed a marked improvement against the Pound and the Euro. Now the nation is not under threat of default, the market seems to have reverted to the Dollar as a ‘safe-haven’ currency, and with no economic data of note released form the US yesterday, the movement can really only be attributed to poor sentiment towards the UK and Europe.

Today will see some high-level market data released from the US, with the market-moving non-farm payrolls report set for release this afternoon, along with the latest unemployment rate reading. The non-farm payroll figures are expected to see a rise of 85,000, but with the figure notoriously hard to predict, and renowned for producing surprises, the currency could well see sharp movements throughout the afternoon, particularly on release.

The Australian Dollar continued to weaken against the Pound yesterday, with the GBP/AUD rate moving up from 1.5221 to break through 1.5400 and is trading above 1.5500 this morning. Despite the nation remaining almost impervious to the global recession 18 months ago, a poor labour market, combined with the worst set of retail sales figures for years, is seeing the currency face fierce pressure.

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