Foreign Currency Exchange Report 29 July 2010

Sterling

The Pound put in a fairly lacklustre performance in yesterday's trading not knowing if it was coming or going as it operated around some key technical levels. Nonetheless it did touch a fresh five month high against the Greenback. However, this was more as a result of a broadly weaker US Dollar than any notable Sterling exchange rate strength.

In what was a pretty uninspiring days trading, comments from the BOE proved the only notable event to provoke any movement. Merv the swerve commented that "the effect of Sterling's depreciation had been rather larger and faster than we were expecting". The market digested this as being indicative that interest rates will remain low for some time to come, as recent high inflationary figures are a result of a broadly weaker Pound.

Coming out of the UK today we have some mortgage data and M4 money supply figures (this shows the amount of money circulating in the economy and is considered an important inflationary indicator).

Euro

The Euro exchange rate continued to hold its own yesterday as it lurked around the recent 11 week highs against the US Dollar. After slumping to a five year low at the end of May it has since rallied by more than ten per cent.

Robust earnings from European banks helped bolster the Euro as European shares hit a five week high with UBS and Deutsche posting solid gains. In addition to this sentiment was also given a boost as solid economic data continued to surprise to the upside with German consumer confidence boosting European recovery hopes.

Going forward, many still remain sceptical and are not fooled by the recent positivity seen in the 16 nation region. However, do not be surprised if we see further setbacks as incredibly tough austerity measures will inevitably put a massive strain on spending and in turn domestic growth.  It wasn't so long ago that many were suggesting the Euro-zone could fall apart due to sovereign debt issues, and whilst the immediate threat may have been extinguished there is still much chance it could rear its ugly head once more.

Keep an eye on German unemployment figures and Euro-zone sentiment later today to help further distinguish how concrete the perceived recovery actually is.

US Dollar

Over the past week we have seen the US Dollar exchange rate trading broadly lower against a basket of major currencies. It seems apparent that very slowly as global conditions appear to continue improving that the US Dollar will depreciate in tandem as this happens.

With a clean bill of health given to the European banking sector and concerns quelled over a second round of the debt crisis, we have seen optimism push higher. In addition to this, an incredibly well received US corporate earnings has seen a seismic shift in risk appetite as investors the world over feel ever more comfortable taking on further risk.

With suggestions being chucked around that we could begin to see weaker growth out of the US, many are beginning to now wonder how the rest of the world could be impacted. Bearing this in mind the next big risk event undoubtedly lies on Friday when US GDP figures are released for the 2^nd quarter.

Other Currencies

In other news the Australian Dollar had a truly torrid day yesterday losing ground against most majors on the back of much weaker than expected inflationary figures, signalling that a rate hike at next week's rate setting meeting is now unlikely. Also overnight, the RBNZ increased interest rates from 2.75% to 3.00% in a move that was widely expected, however, the New Zealand Dollar is down on this morning's trading as they signalled it intends to slow down the future pace of rate increases.

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