Foreign Currency Exchange Report 26 August 2010

27 August 2010

 

Sterling

 

With no economic reports released from the UK yesterday the Pound still had a positive day after mainly weak figures from both the Euro-zone and the US.

 

Against the Euro, the Sterling exchange rate edged up in the afternoon reaching a high of 1.222 on the interbank, clawing back earlier losses seen from a boost to the single currency following a higher than forecast German sentiment survey, this was soon dampened though by concerns about the outlook for peripheral Euro-zone countries, and later a rating downgrade to Ireland.

 

Against the US currency our underdog Pound battered the US Dollar following data showing that US family home sales fell again in July and this set the slowest pace on record. This data came after the equally disappointing durable goods orders, and allowed Sterling to climb about 1% through to this morning's trading, showing 1.558 on the Interbank.

 

Data out today is still pretty thin on the ground with only a CBI report out at 10:00, but trading could be volatile ahead of tomorrow morning's gross domestic product figures from both the UK, and the US later in the day.

 

Euro

 

After a positive start to trading yesterday following a much stronger than forecast German IFO data, the 16 nation currency then returned the gains after yet another downgrade from Standard and Poors on one of its member nations, and further uncertainty over the sovereign debt crisis particularly affecting Greece.

 

The IFO data from Germany which measures business sentiment printed a far better than expected 106.7, up from what many saw as overly optimistic at 105.8 as forecast, and the CCI (Current Conditions Index) hit 108.2 versus the 107 priced in. The IFO institute did, however, express that although the economy remains stable at high levels in most of the euro regions, it expects a slight weakening of export growth as the year progresses towards the colder season.

 

Despite those positive movements in the morning, the ratings agency S&P cut Irelands credit rating one notch to AA-, as they now believe the country needs closer to 50bn than the proposed 35bn to be pumped into their banking system, and also hinted that a further downgrade is also likely if the fiscal cost of supporting the banking sector rises even further. The Irish treasury agency did respond, however, claiming the downgrade was flawed as there is still strong demand for Irish government bonds, but these comments fell on deaf ears as the damage was already being leaked into the currency markets.

 

It appears that there is never only one outcome from any situation - over in the Euro-zone, the single currency continues to struggle between the forces of risk aversion and relative growth. The European spin doctors argue that a possible double dip recession in the US will drag down the rest of the world, triggering massive safe haven moves into the Dollar and Japanese Yen and lead to a weaker Euro. Meanwhile the more optimistic push is the case that recent economic performance (particularly from Germany) is so much stronger than recent reports from America and the UK that  the poor performing currency deserves to appreciate due to growth differentials, leading to finally exiting the seemingly never ending great recession.

 

 

US Dollar

 

Wednesday saw the US Dollar exchange rate appreciate by nearly 1% across the board thanks again to uncertainty around the globe, but gave back those gains later in the day after a bleak durable goods report, leading some to suggest the yanks are considering pumping yet more money into their struggling economy.

 

 

In yet another disappointing data announcement out of the US, durable goods missed their forecast by a wide mark increasing by only 0.3% versus expectations of a 3% rise. Taking out the volatile transportation sector, durable goods actually declined by 3.8% versus projections of a 0.5% rise. The far worse than expected figures indicate that the manufacturing sector is slowing rapidly and in what may be an ominous sign for future US growth business capital spending showed a massive contraction in July.

 

The disappointing durable goods data and weak housing data from Tuesday merely underlines the very slow pace of US recovery and suggests that consumer demand is deteriorating rather than improving as we move into the second half of the year, that could weigh on the Dollar as markets begin to price in much lower than expected US growth, and in turn a broadly weaker Dollar.

 

Please contact Foreign Currency Exchange on +44 (0) 20 7989 0000 to discuss your currency exchange requirements.