Daily Foreign Exchange Market Update 10/10/2011

Mon, October 10, 2011

The Pound finished last week higher against both the Euro and the US Dollar in the foreign exchange market; despite a week of fairly negative economic data. The GBP/EUR exchange rate opened on Monday at 1.1512, and despite falling back from an early week high of 1.1722, managed to close the week out just shy of 1.1600 at 1.1599. The GBP/USD exchange rate followed a pretty similar pattern, opening the week at 1.5587, picking up to 1.5645 towards the end of the week, and despite falling to 1.5583 by the market close on Friday; still finished higher than Monday. The week did open with some positive data, with September’s PMI manufacturing index showing a positive upturn; but this was to be the only real highlight of the week. The final reading of 2^nd quarter UK GDP saw a downward revision, with the annual growth rate showing a disappointing 0.6%, and quarterly growth dropping to 0.1%. The Bank of England’s (BoE) decision to add an extra £75bn to its asset purchase programme was the main risk event of the past week. With growth figures for the first two quarters of this year being revised downwards, and household spending at its lowest level for a decade, the feeling is that the central bank had to act immediately to try and head off the risk that the UK economy will fall back into recession. There is a risk however, that by engaging in a further round of quantitative easing, the BoE will be creating additional inflationary pressure, which could have a damaging effect on spending.

The week ahead will see some high-level market data release from the UK. Tuesday will see the release of RICS house price balance figures, along with industrial and manufacturing production figures for August. More importantly though will be the NIESR GDP estimate for September; although the expectation is to see a fairly low-level figure, despite the Bank of England’s additional monetary stimulus efforts. It may well be though, that the additional funds will take some months to have a beneficial effect. Wednesday will focus on the labour market in the UK, with the release of jobless claims numbers, along with the latest claimant count and ILO unemployment rate figures. The economic docket for the UK will round off on Thursday with visible trade balance numbers, which are expected to further reinforce the UK’s negative trade deficit as a result of huge volumes of import as opposed to minimal export activity.

The Euro closed the week out lower against both the US Dollar and the Pound in the currency exchange market. The economic picture for Europe was fairly mixed, with German and Euro-zone PMI manufacturing indices both showing an upturn for September, but with PPI and retail sales figures showing vast drops. German factory orders figures showed that annually the index level fell sharply, from 8.9% to 3.9%, but there was a slight increase in the monthly level; from -2.6% to -1.4%. Like the UK though, the week’s main market focus was on the European Central Bank’s (ECB) policy meeting. The central bank announced no change in the base interest rate, but that it will be offering new emergency loans to banks in the Euro-zone, with the intention to help the region’s banks during the government debt crisis. At his last rate-meeting before being replaced by Mario Draghi, President Trichet stopped short of announcing any rate cuts, but warned that ‘’The economic outlook remains subject to particularly high uncertainty and intensified downside risks’’.

This week will contain slightly less data from Europe, but most of it will be fairly influential upon release. Wednesday will see the release of Euro-zone industrial production figures, then on Thursday the market will be primed for the latest German CPI (inflation) figures. Thursday will also see the ECB’s latest monthly report, which will give some further insight into the central bank’s expectations for economic growth and inflation over the coming months, which could well give some direction to the currency. Friday will close out the week with a turn back to inflation; with the release of Euro-zone CPI (inflation) figures.

The US Dollar fells slightly across the week against the Pound, but gained back some ground against the Euro. The EUR/USD exchange rate pulled back across the course of the week, from the market’s open at 1.3526 on Monday, to trade at 1.3432 by Friday’s close. There was a host of positive news from the US during the week, with ADP employment numbers for September picking up from 89,000 to 91,000 and also Friday’s non-farm payroll figures showing a sharp rise from 42,000 to 137,000. The overall unemployment rate in the US saw no change despite these increases though, holding steady at 9.1%. Federal Reserve Chairman Ben Bernanke’s appearance in front of the joint economic committee on Tuesday provided plenty of food for thought, as during which he stated that The Federal Reserve is prepared to take further steps to help an economy that is "close to faltering," Fed chairman Ben Bernanke said on Tuesday in his bleakest assessment yet of the fragile U.S. recovery. Citing anaemic employment, depressed confidence, and financial risks from Europe, Bernanke urged lawmakers not to cut spending too quickly in the short term even as they grapple with trimming the long-run budget deficit. Bernanke said "The Committee will continue to closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in the context of price stability,".

The week ahead is quite light in terms of US economic data, with the minutes from the Federal Reserve’s last rate meeting being released on Tuesday, and aside from trade balance figures on Thursday and Friday’s advance retail sales numbers, the only real figures of note is Friday’s University of Michigan confidence index. The currency is likely to take direction from these numbers though, as all the figures are quite high in terms of economic importance.

This Daily Market Update is brought to you by The Market Team @ KBRFX – Exchange Rate, Currency Conversion & Foreign Currency Transfer specialists.

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