Foreign Currency Exchange Report 24 August 2010

24 August 2010

 

Sterling

 

The Pound had a mixed day in the markets yesterday as economic data continued to prove inconsistent. A quarterly gauge of business confidence saw the Pound exchange rate trade at its lowest level against the US Dollar in close to four weeks, as investors grew concerned that the economic recovery in the UK may be slowing. Suitably conflicting sentiment was provided as a survey suggested that foreign bids for British companies could boost demand for the UK currency, prompting a confused tone as to how to regard the Pound.

 

Going forward the market is very much focused on how tightening fiscal responsibilities will impact growth prospects. Even despite last month's exceptionally strong 2^nd quarter GDP data a recent poll has shown that investors are the most pessimistic towards the pounds future than at any time since May 2009, when the UK was at danger of losing its AAA credit rating. The predominant reasoning behind such pessimism stems from Cameron's proposed budget cuts which look to completely eradicate the budget by 2015 via spending cuts of up to 30 billion pounds annually.

 

Bearing this in mind, the Pounds fate will be heavily implicated on revisions to 2^nd quarter GDP released out of the UK on Friday. Given that this is the Pound's biggest rally in 14 months, it would be a shame to miss such great levels. Already in this morning's trading we have seen GDP spiral sharply lower on the back of BOE Policy Maker Weale saying the UK faces a real risk of a second recession.

 

Euro

 

The Euro had a tough day across the board yesterday seeing it hit a two month low against Sterling, as sentiment toward the single currency turned. In recent months the markets have been heavily focused on various central banks' attitudes toward propping up our still struggling economies with incredibly low interest rates and monetary stimulus.

 

Bearing this in mind the Euro was heavily sold off in yesterday's trading on the premise that further dangers continue to lurk in the struggling 16 nation region. Axel Weber, a member of the ECB prompted such speculation by suggesting that the ECB's bank liquidity assistance should be extended further.

 

Such comments bore ever more weight as Weber is generally regarded as being the first in line to usurp Jean Claude Trichet as the next head of the ECB. Given that recent Euro-zone economic data has consistently surprised on the upside this provided a fresh blow to the single currency, and a startling reality that even the strongest data cannot distract away from the serious concerns over Euro-zone sovereign debt fears.

 

Going forward in the short term it is certainly fair to suggest that strong Euro-zone data particularly out of Germany could provoke temporary Euro exchange rate strength. However, given the fresh fears of the debt crisis re-emerging it is certainly fair to suggest we could perhaps see a broadly weaker Euro going forward.

 

US Dollar

 

The US Dollar's recent demise has been reversed in recent weeks on the back of faltering global growth prompting a fresh flight to safety in the US Dollar.  Broadly weaker US data combined with much speculation that the FED would extend their Quantitative Easing program helped push the US Dollar weaker against most major currencies.

 

With the ugly sister contest currently being won by the Euro-zone and the FED holding steady on any further easing of their monetary policy, the previously undermined Greenback has strongly rebounded.

 

Currently, only the major economic releases prompt any notable Dollar movement, otherwise direction is a direct result of global sentiment and events ongoing the world over. If you have a Dollar requirement, gambling on the exchange rate improving in your favour is a notoriously risky strategy. Given the irrational nature of the GBP/USD pairing, there is solid reasoning as to why it is often brandished by investors as the devils exchange rate.

 

Housing data is released today, however, if GDP figures come in strong on Friday, the recent bout of US Dollar exchange rate strength could persist.

 

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