Foreign Currency Exchange Report 23 July 2010

Sterling

Sterling experienced a relatively steady day against the Euro yesterday whilst gaining some strength against the underperforming US Dollar, as attention turned to the eagerly awaited results of European banks stress tests due for release this afternoon.

Sterling looked set for a positive day after retail sale figures came in better than expected at +0.7% month on month and +1.3% year on year against forecasts of +0.5% and 1.0% respectively. However, the Office of National Statistics announcement that improved sales were driven by World Cup boosts to sales of electrical goods. This suggests that these improvements were more likely than not a 1 off as opposed to any sustainable improvement.

Bank of England member and senior economist Spencer Dale highlighted the growing concern regarding the future health of the UK economy and consequently that of Sterling by stating that the British Economy faces a triple whammy of higher inflation, lower growth and rising unemployment. This suggests the Sterling exchange rate will struggle in the near-term as the UK economy struggles to grow in the wake of the recent economic crisis. However, a point worth noting from his negative comments is that higher inflation could lead to higher interest rates which could in turn lead to short term Sterling exchange rate strength but any such interest rate increases still seem extremely unlikely at this stage.

Today sees the release of important Gross Domestic Production figures from the UK and a high reading around the expected 0.6% or higher could lead to short term Sterling exchange rate strength.

After this, attention will continue to focus on the release of the results of European Bank stress tests which is expected to lead to Sterling weakness.

Euro

The single currency experienced a choppy day yesterday as traders reduced risk exposure and positioned themselves ahead of what could be high volatility on the release of bank stress test results this afternoon.

The Euro exchange rate gained broadly as investors grew optimistic that the bank stress test results are unlikely to send shockwaves through the markets. Opinions regarding the anticipated results have been divided to say the least as, despite most commentators anticipating the results to show all banks comfortably passed the stress tests reports yesterday in the Wall Street Journal suggest that at least one Greek Bank may not have passed the stress test. Reports in several Spanish financial papers suggest several Spanish banks may also have failed the stress test, so expect high volatility on the release of this figure.

Yesterday saw PMI figures for the Euro-zone come in better than expected at 56.7 against expectations for a reading of 55.5 and helped see the Euro exchange rate gain strength against the US Dollar back towards the 1.30 level (interbank) after falling to mid 1.27 (interbank) levels over night  Wednesday on diminishing confidence for the world-wide economic recovery.

German IFO figures due this morning could be positive for the Euro this morning but attention will be predominantly focused on the stress test results, so keep in contact with your currency broker today to take advantage of the rates as volatility is likely to be high.

US Dollar

The US Dollar continued losing ground across the board, losing approximately 0.75% against a basket of currencies as traders continue to factor in ever increasing signs that the economic recovery has stalled.

Despite existing home sale figures and leading economic indicators falling less than expected yesterday, with existing home sales falling to -5.1% against an expected loss of -8.1% and US leading indicators falling 0.2% against an expected fall of 0.3%, negative Jobless claims figures rising to 464,000 against expectations for job losses to have increased by 445,000 show the US recovering is a long way from the robust recovery that was expected and lead to US Dollar exchange rate weakening.

Head of the Federal Reserve Ben Bernanke yesterday reaffirmed his previous comments suggesting the potential for further monetary policy easing in the US by stating the outlook is unusually uncertain.

A change in the closely monitored FED language suggests interest rates will remain lower for longer, and the US Dollar exchange rate could continue to weaken going forward as the FED may look at buying more securities.

Today sees the release of no economic data today from the US so movement will be dictated by the Stress test results from Europe.

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