Foreign Currency Exchange Report 25 August 2010

25 August 2010

 

Sterling

 

The Pound found itself range bound against both its major counter parts yesterday as it struggled to find its footing and push higher on sentiment. Confidence in the UK was again dented yesterday as a report from Markit & YouGov showed a record number of households now fear that their standards of living will suffer as inflation overrides any pay rises.  Any upward movement for the Pound will be short lived as the government's spending cuts and tax rises increase to ensure the budget deficit is dealt with efficiently.

The Pound exchange rate again fell short with the release of UK mortgage approvals which showed that net lending by the banks fell to £2bn in July, the second lowest levels since February 2001. What may also add to investors worries was the issue that the markets shows little sign of recovery as the number of mortgages approved for house purchases dropped for the second month in a row.

 

Comments from MCP member Weale yesterday morning were also unraveled through the day and his fear that the Bank of England forecast for growth for 2011 and 2012 are far too optimistic only helped to tighten the net on the Pounds performance.  Let's hope the UKs GDP figures on Friday offer the Pound some form of respite and aid its upward battle.

 

No UK data today

 

Euro

 

The Euro was unable to progress in a straight line yesterday as uncertainty over Euro-zones debt repayment hindered any sizable growth. The only form of good news came when European Industrial Orders rose more than economists expected in June as strengthening global growth is being seen to help stoke the areas quickest expansion in four years in Q2. Orders in the 16 nation area increased 2.5% from May. However, the picture is not that bright as the overall economy is showing signs of weakness as governments increase consolidation efforts.

 

With German Q2 GDP figures coming in very much as expected, the Euro looked for comments and sentiment from figure heads to be its main catalyst.  Unfortunately the first came from Nobel Prize winner Joseph Stiglitz as he strongly suggested that the European Economy is at high risk of sliding back into a recession as major government's cuts spending to relieve budget burdens. He talks of most European nations being so transfixed on reducing their deficits below the EUs limit of 3 percent level that they have totally missed the bigger picture and now risk a double dip.

 

Euro-zone data released today comes in the form of German IFO figures.  These are expected to be below par and will add to further wows in Euro land.

 

US Dollar

 

The US Dollar's performance was distinctly average yesterday as it too battled in a range against both the Euro and Sterling for most of the day. The Dollar endured some pretty horrific figures as we saw US existing home sales plunge to an annualised pace of 3.8 Million in July from a revised 5.26 million in the previous month.  This marked the fastest pace of decline since records began in 1999 and was put down to the end of tax credits designed to boost sales. This news has now helped to increase fears about the US's economic recovery and its ability to stave off another financial meltdown.

 

The outlook for the US economy is bleak as low employment levels and now low home sales figures add to a general feeling that consumers in the US are losing the battle to help promote regional growth. The resulting outcome of this is that the Federal Reserve is likely to maintain its dovish outlook for future policy and Chairman Bernanke likely to maintain his hard line on holding interest rates at zero for an extended period.

 

The US Dollar will in my view stay quite buoyant against its counterparts in the coming months as risk aversion comes to its aid. However, if we see confidence return to what is a fragile Euro-zone then a combination of risk and appetite and faltering economic sentiment will be its undoing.

 

Keep an eye on Durable Goods Orders and in particular New Home Sales figures release later today.

 

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