Foreign Currency Exchange Report 26 July 2010

Sterling

Of all major currencies, the Pound showed the strongest performance last week, regaining its losses against the US Dollar and Euro from earlier in the week following a far better than expected Gross Domestic Product report on Friday.

In the second quarter of this year the UK economy grew by 1.1%, the strongest pace of growth shown in the last 4 years. The acceleration in activity between April and June also pushed the annual pace of GDP growth from -0.2% to 1.6% overall. Contributing factors were shown to be consumer spending, construction, business services and finance, and manufacturing. The only problem with numbers this well improved will generally mean that they're exceptional and in turn potentially unsustainable.

This week the only meaningful economic announcements come in the form of mortgage approvals and consumer credit, but thanks to a slightly brighter outlook here in the UK compared to the uncertainty in the Euro-zone there is every chance that the Pounds recent run of strength may continue slightly.

Euro

Late on Friday's trading session we saw the release of the stress test results, confirming which banks theoretically would and wouldn't be able to withstand another recession.

Of the 91 banks that were reviewed, only seven failed the stress tests, leading many to speculate that the tests were not testing enough.

Five out of the seven were Spanish banks, one was a German bank and one was a Greek bank. Their combined shortfall was a mere 3.5bn, far less than the markets forecast of capital shortfalls ranging from 30bn to 90 bn. All of the larger European banks passed and those that failed were either very weak to begin with or already expected to do so.

Despite the apparent leniency of the tests, the Euro exchange rate still managed to keep its head above water thanks to German IFO figures released earlier in the day. The actual figure released was 106.2, up sharply from the 101 forecast, meaning that the key survey of economic conditions in the Euro-zones largest economy is still improving. This was the largest single month improvement since East and West Germany rejoined. There are no economic announcements today.

US Dollar

On Friday there was no economic data released of any real value, so the US Dollars fate weighed heavily on the European stress test results, and after the better than expected figures were digested by analysts it appears that risk aversion is sinking now that things appear to have settled on the continent. That could change this week as we have a heavy economic calendar in the US that includes new home sales, consumer confidence, durable goods, the Beige Book report, second quarter GDP and Chicago PMI. Already most of the economic releases are expected to be weak, and given that the safe haven attraction to the currency may begin to wear off thanks to less meltdown potential throughout Europe, we are likely to see the US Dollar exchange rate steadily weaken as the week goes on.

Data released today

Manufacturing activity as well as new home sales figures

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