Foreign Currency Exchange Report 2 July 2009

Sterling

Yesterday was a quiet day for the Pound with no real exchange rate movements of note against the Euro or the US Dollar, remaining fairly range bound for most of the day. There was some positive news however as figures from the manufacturing sector hit a 15 month high and although they still showed a decline in output, the decline was less severe than expected. This boosted the Pound exchange rate after the GDP figures from the previous day showed the economy shrank by 2.4% to the lowest point since 1958, suggesting the recession is far from over, contrary to recent media speculation. With rising unemployment and a housing market remaining flat it's hard to see where things are going to improve in the short term. A further concern for bullish investors (aggressive) of the Pound will be the 10th straight decline in the index of services which fell 1.2%. The sector accounts for 70% of the economy and unless domestic growth significantly improves the outlook for a recovery will dim. This could mean a longer spell of volatility for currency buyers so if it was me, I would buy now and save the pressures and hassles of watching the markets 24 hours a day waiting for something that may never happen.

Euro

Yesterday was a mixed day for the single currency as positive data from German retail sales and better than expected manufacturing data provided a welcome boost. However, investors remained cautious ahead of today's interest rate decision at 12:45 and as such no real gains were made against any of the major currencies. I believe that the ECB will keep rates on hold this month, however if Jean Claude Trichet highlights issues surrounding some of Europe's ongoing problems in failing countries like Spain in his post decision speech, there could be some risk of Euro currency weakness as this will leave the door open for potential rate cuts further down the line. Also out today are figures for Euro Zone unemployment which should give more details about the severity of the recession overall. If the figures are worse than expected, I would anticipate Euro currency weakness and vice versa.

US Dollar

Yesterday was a further blow to the Greenback after news that cited sources as saying China has asked to debate proposals for a new global reserve currency at next week's G8 meeting. Against the Euro, the Dollar exchange rate lost roughly 1% and nearly the same against the Pound although against Sterling the currency losses were quickly clawed back. The ramifications of Chinas comments are that the Dollar could eventually lose its safe haven status amongst investors which has been the source of much of the Dollar currency strength. If these comments were to continue then I might expect to see further Dollar exchange rate weakness, especially against the Euro as EUR/USD is the one of the most traded currency pairings. Data out today includes the changes in Non-farm payrolls due out at 13:30. The forecast is for a further loss of 365,000 jobs in the US so keep an eye out for any surprises.

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