Daily Foreign Exchange Market Update

Fri, August 19, 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 exchange rate picked up from the morning’s open at 1.1463 to 1.1516, with the GBP/USD exchange rate falling from 1.6513 down to 1.6473 by the close of the UK business day. The sole piece of economic data from the UK yesterday was disappointing; with retail sales falling annually from 0.2% down to -0.2%, and month-on-month from 1.0% to 0.2%. This was not good news for the UK economy, and the pound did weaken slightly on the figures release.

This morning has seen the release of public finances figures, which showed that the amount of money financed to the UK government last month fell, from 20.4 billion pounds, to -5.6 billion pounds, a positive sign; and also public sector net borrowing fell, from 12.4 billion pounds to -2.0 billion. This shows that the UK government are implementing cutbacks to try and balance their budget sheet; which could be attributed to the currency’s gain this morning amid the debt woes in Europe and recessionary fears in the US.

The Euro lost ground across the board yesterday, the EUR/USD rate falling from 1.4406 at the morning’s open, down to 1.4302 by the end of the day. There were no significant figures released from Europe yesterday; with movements being based on the increased negative sentiment towards the Euro-zones debt contagion worries, and the current instability within the European Union.

This morning has seen the release of German producer price figures, which showed that prices rose annually; from 5.6% to 5.8%, and month-on-month from 0.1% to 0.7%. This could be an early indication of inflationary pressures in Europe, and could well hinder economic growth, as the ECB has already indicated that the base interest rate is unlikely to be raised for a third time this year.

The US Dollar did regain some ground against the Pound and the Euro yesterday, but the nation still faces fierce pressure as there is increased speculation that the US could yet slip back into recession, despite vast sums being spent on trying to stimulate the economy. Yesterday saw the release of CPI (inflation) figures from the US, with price growth holding annually at 3.6%, but the index reading excluding food and energy rose from 1.6% to 1.8%, which shows that aside from increased commodity prices, there is inflationary risk in the US; which could be damaging for the economy, as the Federal Reserve is in no position to raise rates to combat inflation with the economy in such a fragile state.

There is no real high-level market data scheduled for the US today, so the currency will be open to movements based on risk sentiment, and news from the world’s other major economies.

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