Daily Foreign Exchange Market Update

Thu, August 11, 2011

The Pound made good gains against the Euro, but fell slightly against the US Dollar in the foreign exchange market yesterday. The GBP/EUR rate moved up from the morning’s open at 1.1307 to 1.1394 by the end of the day; however, the GBP/USD exchange rate dropped throughout the day, from 1.6258 down to 1.6179. The main economic event in the UK yesterday was the Bank of England’s inflation report; with the bank taking a very dovish stance towards policy. Governor Mervyn King indicated that he expects inflation to fall back below the bank’s target level of 2.00% in the medium-term, and that they have cut their growth forecasts because of weakness in the global economy, citing the Euro-zone debt crisis as a possible dampener to the UK’s economic prospects. Many market experts are now predicting that the bank may not start raising interest rates until well into 2012, and this could be a possible reason that the Pound lost ground against the Dollar.

Today will see the release of the Nationwide Consumer Confidence report from the UK, with any sharp drop in the reading likely to affect the currency. The report will give an insight into areas of worry for consumers, and their assessment of the current economic situation.

The Euro fell against the Pound and the US Dollar yesterday, with the currency exchange market seeing a shift away from the single-currency as there is still a feeling amongst many experts that despite the ECB’s purchase of Spanish and Italian securities, there is a possibility that should one of the nations start to struggle with increased debt loads, there may not be enough funding available to bail them out. The only economic data of note from Europe yesterday was German CPI (inflation) figures which showed that price-growth held at 2.4% annually; which is still above the bank’s target; but crucially is not rising, which lessens the pressure on the ECB to continue hiking rates.

This morning has seen the release of the ECB’s monthly report, with the central bank indicating that that the last two rate-hikes; whilst questioned by some in the market were warranted, given the upside risks to price stability. The report enhances the bank’s stance towards inflation; that they aim to keep price-growth close to 2.0%, which in turn they believe will support economic growth and job creation in the Euro area. The rhetoric is that the bank will keep policy ‘accommodative’ to support its aims, and will ‘monitor very closely all developments with respect to upside risks to price stability’.

The US Dollar made impressive gains across the market yesterday, with dropping growth prospects in the UK and the debt contagion issues in Europe seeing an inflow of funds into the Dollar. The EUR/USD rate fell, from 1.4378 down to 1.4198 by the market close. There was also some positive news from the US with, the monthly budget statement showing a decrease in the negative balance, from -$165 billion to -$129.4 billion.

Today will focus on the release of the US trade balance figures. The nation relies heavily on imported goods, so has a constant deficit, but the currency may weaken slightly if this increases month-on-month.

Data Releases