Daily Foreign Exchange Market Update

Tue, August 09, 2011

The Pound continued to make gains against the Euro, but once more fell versus the US Dollar in the foreign exchange market yesterday. The GBP/EUR rate moved up to 1.1492 from the morning’s open at 1.1440, with the GBP/USD exchange rate falling from 1.6426 in the morning, down to 1.6355 by the close. There was no economic data of note released from the UK yesterday, but the nation has been gripped by the rioting, looting and violence that has spread through the nation’s capital over the past 3 nights. With homes and businesses affected, there is sure to be a knock-on effect on an economic level, with conservative media estimates putting the value of damage caused at over £110 million.

This morning has already seen the release of some noteworthy data from the UK, with manufacturing production for June seeing a downturn in activity; from 2.8% to 2.1%. Industrial production rose slightly, from -0.9% to -0.3%, which is positive, but the UK’s trade balance widened, with the negative deficit increasing to nearly £8.8 billion. With the currency remaining fairly weak, and the huge-over reliance on imported goods, this may suggest that retail prices, and inflation could rise; which would cause problems for the Bank of England.

The Euro lost ground against the Pound and the US Dollar yesterday, the EUR/USD rate moving down to 1.4229 by the end of the day, from the morning’s open at 1.4356. European stock markets fell, as did the UK’s, with billions being wiped off the value of major indices. The currency is also under pressure, with Italy and Spain needing the ECB’s intervention to buy bonds to try and raise capital for both nations, with debt contagion worries still at the forefront of the Euro-zone’s problems.

There are no scheduled data events of note from Europe today, so the currency will be subject to trading patterns, and shifts in sentiment.

The US Dollar seems to be still benefiting from its ‘safe-haven’ status despite the credit rating cut, with the currency gaining across the board yesterday. There were no economic figures of note released throughout the day, so it is clear that amongst the market turmoil across Europe and the UK, that money is flowing into the US currency, as investors look for low-risk and secure places to put funds.

Today could see the currency make sharp moves in the currency exchange market, with the Federal Reserve set to announce their interest rate decision this evening. Despite the market being almost certain of there being no change in the base-rate, any accompanying comment could affect the currency, with many market experts predicting that the US will undertake a further round of quantitative easing before the year is out. Any hints towards further printing of money would stoke inflationary fears in the US, and would also suggest that the current situation may be worse than the media are portraying. The government are also still facing pressure over the deep cuts they will have to implement as part of the debt ceiling bill, which could have dire consequences for the economy.

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