Foreign Currency Exchange Report 11 August 2010

11 August 2010

 

Sterling

 

The Pound was down across the board in early trading yesterday as weaker than expected retail sales and housing market data undermined Sterling. The high street has been experiencing a post World Cup summer slump, as consumer confidence drops, prompting them to feel less willing to carelessly spend away their football woes. In addition, news that house prices have fallen for the first time in a year due to supply rapidly outstripping demand led to the FTSE tumbling into the red.

 

In what is still a very mixed economic environment, Sterling did receive a mid afternoon boost as data showed our trade balance account shrunk by more than expected as the value of UK exports was at its highest for 2 years. Add this to comments from business secretary Vince Cable that the UK stands a 1 in 4 chance of slipping into a double dip recession and you have a highly unclear future.

 

Released from the UK later today we have the Bank of England releasing their quarterly inflation report. With so much attention in recent months surrounding inflationary figures continuing to surprise on the upside, many have been calling for the bank to hike interest rates, to stave off the threat of spiralling inflation.  We will learn later today how serious the bank regards such a threat, and will also hear renewed growth figures for the year. Given that the Pound has failed to break above the psychologically important $1.60 level and, with slightly weaker economic data as of late, recent Sterling exchange rate strength could come to an end.

 

Euro

 

With some market participants forecasting the breakup of the entire Euro-zone only a month ago, now they are pointing to the strength of the German economy to justify the currency's recovery.  In recent weeks the Euro exchange rate has generally been rising, due to the risk of the break up diminishing but most notably due to the recent shift of the EMU showing signs of strong growth. This is exacerbated when compared to the sharp contrast of the slowing US economy and the uncertain future of their monetary policy.

 

With nothing notable out of the Euro-zone today, and a fairly dull session yesterday, expect any Euro direction to be provoked from activities elsewhere.

 

US Dollar

 

In recent weeks we have seen improving global conditions stoke the demand for the safe haven appeal of the Greenback, prompting it to hit multi month lows against many major currencies. With global conditions rapidly improving and the recovery seemingly sputtering to a stop many began predicting the US Dollar exchange rate to plummet further.

 

Yesterday provided a perfect example as to how unpredictable the currency markets still remain. Ahead of the FED's central bank meeting the mighty Dollar advanced against most major currencies, eating back most of its previous losses seen over the last week. 

 

Discouraging data from China, and worries over US mortgage lender Freddie Mac, prompted many to take a negative tone, and buy into the Dollar seeking safety.

 

After weeks of speculation the FED last night warned that America's recovery was losing steam and announced a shift in its economic stimulus programme. It made it clear that it will not extend its QE, however, it will instead re-invest money from its portfolio of maturing mortgage bonds. This sends a stark message about the fragility of America's economic recovery amid persistently high unemployment and a stagnating housing market. Despite the negative vibe given off we could actually see the Greenback strengthen, as the market takes the view that concerns over further rounds of QE were in fact overcooked.

 

Bearing all this in mind, many of you out there have been licking your lips at the prospect of getting more buck for your bang as the Greenback becomes much cheaper. However, as long as the global recovery remains inconsistent, there will always be scope for events outside of the US dictating its strength.

 

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