Foreign Currency Exchange Report 15 March 2010

Sterling

The possibility of a hung parliament in the UK still appears to be the ultimate driving force behind Sterling exchange rate weakness at the moment. Two more opinion polls published in the Times and the Telegraph over the weekend will only help the drive a stake of uncertainty deeper and help fuel the Pound's demise.

The Pound did however perform slightly better on Friday with a second day of gains against the US Dollar exchange rate as speculation that the fall in house prices was overdone. A report showed UK house prices rose at the fastest pace in 7 years. The Pound has still fallen 6.4% lower against the US Dollar in 2010 but some analysts believe we may see a short term rebound as the Pound exchange rate didn't manage to stay below $1.50 (interbank) for as long as expected.

With a widening UK trade deficit and weaker than expected Industrial output data, the Pound is looking to the week ahead and the release of the Bank of England minutes. The hope is that the Bank will give investors some direction on interest rates and potential extension of QE rather than leaving the markets in limbo as having previously opted out of and any statement for its forward thinking. If the BOE can shed its seemingly dovish stance, the Pound exchange rate may well benefit against its counterparts, so be vigilant if you plan on converting soon.

Euro

Last week comments from ECB member Nowontny weighed heavily on the Euro exchange rate as he said that governments in the Euro-Regions may face debt spiral if they don't actively show signs they are cutting their budget deficits next year. His comments highlighted the problem that if governments don't commence this then debit will spiral and any future shakeouts will be more expensive and painful to the several European countries involved. The Euro exchange rate has shed 3.9% against the US Dollar this year alone on speculation that Greece's debt problem will spread into the other EU nations. Many analysts think that is not right to think that Greece will leave the 16 member region and that in fact a weaker single currency is helping exporters.

Whatever the outlook, investors will watch closely this week as EU officials meet to talk out a rescue plan and the potential future of Greece's debt. Many have commented on an IMF type lending program to prevent a broader crisis but skeptics believe that this would only mean that other nations would have to stump up the cash in what are already hard times. If Greece is unable to pay back the loan then counties will be less willing to inject cash into what would be seen as cash mule. In reality Greece will need to work down its own debt mountain but its inability to do so in a time scale which is approved by the EU is causing concern and further Euro currency weakness is expected.  If officials are able to walk out with a viable plan this week then the markets should react accordingly, so expect volatility this week.

US Dollar

Last week the US Dollar and the Yen exchange rates were seen to fall against most of their counterparts as concerns eased over Greece's debt and that US and European reports signaled economic recovery is advancing, inciting hunger for riskier assets. The US Dollar exchange rate was seen to lose ground to the Euro and the Pound in Fridays trading which came as a surprise to the markets as on Friday it had seen  better than expected US retail sales figures.

The week ahead is likely to continue to be volatile for the Greenback as we await the Federal Reserve key interest announcement on Tuesday.  For a while now, the FED have commented that they want to keep interest rates low for an extended period, however, recent comments from an FOMC member show that many are looking to move away from this stance and will look to raise interest rates sooner than expected. Combine this announcement with the release of the Consumer Price Index figures on Thursday and the US Dollar is looking set to take a hold on the markets and post further gains.

Data Releases

Nothing of any significance today- but we have a busy week ahead with German ZEW from the Euro zone and US interest rates on Tuesday as well the MPC meeting minutes on Wednesday.

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