Foreign Currency Exchange Report 3 March 2010

Sterling

The Sterling exchange rate continued pushing lower yesterday testing the lows established on Monday on lingering concerns surrounding the UK economy, and the threats associated with a hung parliament.

Conservative leader David Cameron announced yesterday that protecting the AAA debt rating is central to the Conservative Party's plans, stating ‘If the deficit is not dealt with it will tip us back into recession'.

This sentiment is exactly what has forced the Sterling exchange rate lower over the course of the last 3 working days in particular, as the growing risk of a hung parliament (which could very possibly be established under the leadership of Gordon Brown, if recent polls are to be believed), is likely to lead to divisions throughout parliament meaning solutions to the ballooning deficit will almost certainly be impossible to establish due to parliamentary division.

Conservative spokesman Clarke emphasised the threat of a hung parliament stating, ‘The last couple of days show UK can't afford 5 more years of Labour. Reigning in deficit is crucial to return economy to normal rates of growth. Pound would go on a downward spiral if the deficit is not dealt with'. This could very well be the contributing factor as to why Sterling continues to push lower.

In what can only be seen as a sign of panic in the face of recent Sterling currency weakness yesterday afternoon, the Bank of England added to Sterling's woes by announcing that next week they will launch a 3 year bond denominated in US Dollar, as opposed to its own currency. This suggests that the Pound could be set to weaken significantly in the near term from its already low levels.

Today sees the release of Consumer Confidence figures which are likely to remain in line with expectations. It does seem likely that the Pound exchange rate will continue with its aggressive downward trend, so keep in contact with your currency broker to avoid future loses.

Euro

The Euro exchange rate continued to strengthen against Sterling yesterday but experienced an extremely mixed day against the US Dollar.

The Euro pushed lower during early trading yesterday on the announcement of further public sector strikes in Greece, but these loses were reversed on anticipation that the long awaited German led bailout of Greece was imminent as illustrated by the tightening of spreads on Greece/German 10 year bonds.

Interesting comments from the Greek Prime Minister when potentially lining up future cuts said, ‘This is reality, not a nightmare' indicating that although Greece seems likely to be saved from their financial mess, he went on to say, ‘We must fight to rescue our children from our country's bankruptcy'. The use of the word bankruptcy is extremely rare amongst political leaders and leads to suggest there is likely to be further weakness and volatility for the Euro exchange rate at some stage in the future.

Elsewhere Ukraine default on its bonds hints at growing threats to European banks which have significant exposure to Eastern Europe, this could weaken the Euro if it were to develop into a financial crisis. However, ECB member Nowotny cheered European markets by saying, ‘Extreme economic crisis is over and growth is back'.

Greece have this morning called a conference for 9.30a.m to announce the new measures regarding their finances so keep in contact your currency broker to take advantage of any volatility.

The Euro-zone sees the release of important retail sale figures this morning which if weaker than expected, could weaken the Euro exchange rate.

US Dollar

The US Dollar gave back some of its early strength against the Euro yesterday, but looks set to continue strengthening across the board as it presses ahead with its economic recovery.

Fed Hawk Hoenig added to growing confidence in the US Dollar by stating, ‘FED funds rate at 1% would not hurt markets'. Growing numbers of comments such as this from the US seem to be laying the foundations for what now seems to be an imminent interest rate increase in the US despite continuing high levels of unemployment.

Today sees no economic data of any significance as the market positions itself ahead of the all important NFP (Non-Farm Payroll) figure due out on Friday. So, the market will look to a speech from US FED member Rosengren at a conference in Philadelphia to give further guidance regarding the US recovery.

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