Daily Foreign Exchange Market Update

Wed, August 17, 2011

The Pound made good gains against both the Euro and the US Dollar in the foreign exchange market yesterday. The GBP/EUR rate picked up from the mornings open at 1.1349 to trade at 1.1392 by the end of the day. The GBP/USD also rose throughout the day, from 1.6339 to 1.1422 by the day’s close. The UK’s economic docket yesterday showed that annually, consumer prices (inflation) rose from 4.2% to 4.4%, and monthly from -0.1% to 0.0% flat. The Bank of England have previously indicated that they expect inflation to peak at around 5.0% in the medium-term, before falling back naturally, so this was not to much of a shock to the market.

This morning will see the release of the minutes from the Bank of England’s last policy meeting, with the currency exchange market likely to take direction from any change in either the voting numbers, or rhetoric. The UK’s labour market will also come under scrutiny; with the release of jobless claims figures, claimant count rate, and the overall unemployment rate. The Pound could potentially make sharp moves if there are any surprises in the numbers.

The Euro weakened against the Pound, but made a small gain against the US Dollar yesterday. The EUR/USD rate picked up from 1.4396 to 1.4414 throughout the day. The drop against the Pound can be attributed to very disappointing GDP figures, from Germany and the Euro-zone as a whole. German growth fell annually from 4.7% to 2.7%, and quarterly from 1.3% to 0.1%, well below the market forecast. Euro-zone combined GDP also dropped sharply, from 2.5% to 1.7% annually, and quarterly from 0.8% down to 0.2%.

Today will see the release of Euro-zone CPI (inflation) figures; with the market expecting no change in price growth; which will be welcomed by the ECB, as a slowing in the growth rate will justify their two rate-hikes that have been implemented so far this year.

The US Dollar lost ground against the Euro and the Pound yesterday, with the economic data released showing a mainly negative picture. Housing starts fell for the month, down from 613,000 down to 604,000, with building permits also showing a decline, from 617,000 to 597,000. There was a slight positive, with industrial production showing a small increase, from 0.4% to 0.9% for the month of July.

The US economic docket today will focus on producer prices for July, with the headline annual index reading expected to hold at 7.0%, with the index excluding food and energy forecast to fall slightly from 2.4% to 2.3%. The US currency could benefit from any negative reaction to the UK’s Bank of England minutes, or the European inflation figures; with it’s status as a safe-haven currency still providing some comfort despite the nation’s reduced credit rating.

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