Foreign Currency Exchange Report 8 March 2010

Sterling

The Sterling exchange rate should have a better week than last, and I expect it to make improvements on the lows seen. The drop in Sterling's value came after recent political polls scared traders with the possibility of a Labour-led hung parliament as a result of the upcoming general election, which would leave a lack of organisation in the bid to successfully cut the UK's soaring deficit.

The Sterling exchange rate fell by more than 4 cents last Monday against the US Dollar hitting a 10 month low before recovering back above 1.50 (Interbank) later in the week on strong service sector data on Thursday.

Another big reason for Sterling's decline was due to a very large currency trade going through, which looked like a corporate transaction on behalf of Prudential and if sources are correct saw a huge amount of Sterling exchanged into the Dollar. This held Sterling down against the Euro as well, but I believe that run has bottomed out.

Euro

The Euro exchange rate has begun to weaken back after last week's rally versus the Pound and the US Dollar. I suppose it was inevitable that we would see some sort of bounce back after the aggressive market movements seen last week but the Euro has had some further positive news with the European governments, led by France and Germany, are set to establish a European Monetary Fund, or EMF, with the aim of reducing economic instability across the Euro zone by creating an institution to bail out indebted countries.

This news follows the economic turmoil seen in Greece and although the creation of the EMF could not be used to deal with the Greek debt crisis, it would create a mechanism for monitoring and preventing a similar situation arising in the Euro zone in the future. The potential creation of an EMF would represent the largest shake-up of the rules since the Euro currency was launched in 1999 and comes after weeks of debate in Europe over how to deal with the Greek crisis.

There are no economic data releases from the Euro zone today but look out for German inflation figures and a speech by ECB president Trichet on Wednesday.

US Dollar

The US Dollar exchange rate gave back some of its recent currency strength on Friday against the Euro and Sterling. This was due to a number of reasons. Partly as a result of profit taking in the Foreign Exchange markets after a very strong week versus the Pound, and partly as a result of growing risk appetite throughout the stock markets from better than expected non-farm payroll figures out of the US.

A number of factors, including less concern with Greece's debt and investors having greater confidence in riskier assets may well cause the Dollar exchange rate to weaken off in the short term. However, any further signs of unrest from the Euro zone or any further negative comments from European leaders regarding Greece could see a strong shift in sentiment so make sure you keep in contact with your currency broker.

Today sees no economic data of any significance so the markets will look to a speech from US Fed member Sack to economists in Virginia. The markets will look for indications regarding the state of the recovery and the economy on the whole.

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