Daily Foreign Exchange Market Update

Wed, August 31, 2011

The Pound lost ground against both the Euro and the US Dollar in the foreign exchange market yesterday. The GBP/EUR exchange rate fell from the mornings open at 1.1310 down to 1.1281 by the days close. The GBP/USD exchange rate showed a much deeper decline though, falling from 1.6380 to 1.6276 by the end of the day. The sole piece of economic data released from the UK yesterday however, was positive; with mortgage approvals for July showing a marked improvement, up from 48,500 approvals to 49,200; which is positive for the housing market.

There are no scheduled economic events for the UK today; so the currency will be open to shifts in risk sentiment and market data from the world’s other major economies.

The Euro made a small advance against the Pound but fell slightly against the US Dollar yesterday. The currency didn’t really receive any boosts from the economic data that was released yesterday, with Euro-zone consumer confidence figures for August showing a minimal improvement, from -16.6 up to -16.5, the index reading still at levels that are the lowest since 2008. Euro-zone business climate indicator figures were also poor, with the reading falling from 0.44 to 0.07, showing an increasingly negative outlook from industry leaders towards current conditions and the state of the overall economy.

This morning has already seen the release of numerous figures form Europe; with German retail sales showing a slight increase annually, from -2.1% to -1.6%, but falling month-on-month, from 4.5% down to 0.0%. Germany’s labour market has come under close scrutiny with the unemployment rate holding firm at 7.0% for August, and the unemployment change showing the labour market lost less jobs, -8,000 as opposed to the previous month’s revised level of -10,000. Later today we will see the release of Euro-zone CPI (inflation) estimates, and also the latest Euro-zone unemployment rate. The currency could come under pressure if there is any disappointment in either figure.

The US Dollar made good gains against both the Euro and the Pound yesterday, despite a huge fall in US Consumer Confidence for August. The EUR/USD exchange rate pulled back from 1.4481 at the morning’s open, to 1.4426 by the day’s close, in spite of the consumer confidence figure plummeting from 59.2 down to 44.5, with the currency exchange market pricing in a level of around 52.0. The drop though, does add fuel to speculation that the Federal Reserve may look to start pressing on with further economic stimulus to prevent the nation falling into a double-dip recession. The release of the minutes from the Federal Reserve’s last policy meeting last night backed this up; with three out of 10 voting officials disagreeing with chairman Ben Bernanke's decision to announce he plans to keep rates close to zero for another two years. Details of the minutes showed that some officials favoured far bolder action than that taken, arguing for a third round of asset purchases (quantitative easing). The minutes stated that "A few members felt that recent economic developments justified a more substantial move, with participants noting deterioration in labour market conditions, slower household spending, a drop in consumer and business confidence and continued weakness in the housing sector."

Today will see the ‘deteriorating’ US labour market come under close scrutiny, with the release of ADP employment change figures for August; with the market forecast for a slight decrease in the number of jobs added, from 114,000 down to 103,000. Traditionally, any signs of weakness should see a currency fall in value, but as with yesterday’s market movements it may well be that the negative data is only serving to increase the likelihood of monetary stimulus from the Federal Reserve, which in the long term should benefit overall economic growth. Factory Orders figures for July will also cross the wires this afternoon, with the market forecast for a positive increase in the index reading.

Data Releases