Foreign Currency Exchange Report 28 July 2010

Sterling

The Pound exchange rate was seen to rise to a five month high against the US Dollar and strengthened against the Euro yesterday as renewed economic sentiment in the region reinforced its position in the market. It gained as much as 0.3% to 1.5577 (interbank) against the US Dollar, the highest level since February and improved 0.1% versus the Euro to 1.1976 (interbank).  The Pound was able to benefit from the release of upbeat data in the form of UK CBI retail sales which grew the fastest pace in more than three years, again giving investor's confidence that the UK's economy is gathering some momentum.

However, a report released yesterday from the Ernst & Young Item Club said that interest rates in the UK need to be kept low for a considerable time and hinted that they should remain at 0.5% until 2014. This news will only help to confuse markets and investors alike as the Office of Budget for Responsibility   stated only recently that they expect interest rates to rise next year. Expect the Pound to remain range bound until clarity is given over these contrasting views.

Today we have the release of the UK treasury Committee Hearing which will shed some light on monetary policy and financial stability.

Euro

The Euro exchange rates made most of its gains against the US Dollar yesterday as a renewed bout of risk appetite pushed it to a fresh monthly high to 1.3045 (interbank) the highest since May 10th. The single currency benefited from a plethora of data releases with German Import prices, German GFK consumer sentiment and Euro-zone June M3 annual growth figures all coming in better than forecast.

However, key commentators are notably cautious of any continued EUR-USD push beyond the summer as concerns resurface that the European nations will not be able to repay their debts. Currency researchers at Standard Bank have been warning clients to make the most of this move while it lasts as the Euro-zone debt crisis is always a credible threat to the stability of the Euro.

Today we see key release as German Consumer Price Index and the resale of the ECB bank lending survey.

US Dollar

The US Dollar once more felt the full brunt of continued investor risk appetite coupled with the release of disappointing New Home sales figures. This figure did in fact show a sharp rise in June compared with May but the US Dollar sell off was put down to the fact that the pace of sales was the second slowest since records began in 1963. Analysts are predicting that uncertainty in the US economy is far from over as sluggish homes sales are a direct result of higher levels of unemployment.

Further US Dollar exchange rate weakness is likely over the coming days as the Japanese Yen in particular has been seen to strengthen even against the higher yielding currencies, as further signs of slow growth in the US will excite demand for currencies away from the US Dollar and for safer assets.

US data today comes in the form of MBA Mortgage Applications, Durable Goods Orders & Fed release of the Beige Book Economic Report.

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