July 3, 2009
Forex Overview
Sterling Overview
In recent weeks the pound hit yearly highs against both the euro and dollar following a surge in global market confidence and positive economic data. As risk appetite returned to the markets the pound made substantial gains, reaching high 1.18’s against the euro and 1.67 against the US dollar.
Along with a return of confidence to the global markets the UK has benefitted from more positive reports closer to home. Housing data from Nationwide, Halifax and RIC’s suggest the housing market is close to bottoming out. In fact Nationwide actually reported growth of 0.9% for the month of June and consumer confidence came in way above expectations.
However, sterling remains fragile and despite recent activity there is little support for the UK currency. This was confirmed when retail sales data was released last week, which was worse than market predictions and reaffirmed the lack of support for sterling as it declined sharply. Many economists are now predicting a ‘W’ as opposed to a ‘V’ like recession, with the economy currently sat at the central peak. If this is to be the case, we could see things take a turn for the worse before a stable recovery becomes more evident.
Our view is that sterling will strengthen towards the end of the year, against the euro in particular although concerns about levels of national debt are likely to keep the pound under pressure. For a more in depth analysis of individual currency pairs, please contact your Currency Dealer for more information.
GBPEUR
As anticipated the ECB (European Central Bank) left interest rates unchanged at 1% at July’s meeting although most were far more interested in what Jean-Claude Trichet had to say about the ECB’s QE (Quantitative Easing) programme. Here the ECB President confirmed they will implement its decision to buy €60bn worth of euro zone bonds between July 2009 and June 2010. In the meantime, the latest ECB forecasts show inflation well below target until the end of 2010 and a swift downgrade to economic growth for the 16-nation currency.
GBPUSD (Cable)
The Fed (Federal Reserve) left interest rates unchanged at its recent meeting although reinforced its QE programme along with the fact that borrowing costs will remain low for some time. The Fed said it intended to buy $1.45tn in mortgage related securities and $300bn in longer term government debt as originally set out. It was also keen to mention that despite data suggesting the pace of contraction is slowing the US economy would remain weak for some time. Yesterday’s Non-Farm Payroll data only reemphasised this fact as unemployment figures for June were more than 100,000 higher that market consensus.
GBPCAD (Loonie)
Sterling has recently touched on an eight-month high against the CAD and run into technical resistance at 1.92 which it may struggle to break. Interest rates remained on hold at June’s meeting and July’s decision is not scheduled until later this month, although it is unlikely we will see any change. Therefore, exchange rate movement is likely to be more dictated by commodity prices in the short-term.
GBPZAR
Interest rates have fallen 4.5% since last November although the Reserve Bank held rates steady at 7.5% at its most recent meeting, choosing to ignore the inflation slowdown. Economic data has been close to forecasts except Producer Prices, which fell in May for the first time in five years. The 3% year-on-year decline reverses the 2.9% increase in the year to April. If sterling can maintain its stance above 12.50, then the prospect of a recovery remains plausible although as risk appetite returns to the market investors will feel more comfortable buying the South African currency and this could strengthen the rand.
GBPAUD
There has been little activity with GBPAUD for some time, largely trading between 1.98 and 2.10. Australian unemployment is not increasing as much as first feared but neither is it slowing aggressively. There seems to be a degree of uncertainty surrounding the Aussie economy at the moment as economic data struggles to give any clear sense of direction. The currency pair seems destined to remain in a similar trading range for the short term.
GBPNZD (New Zealand dollar)
Following Australia’s announcement of modest growth New Zealand delivered a 1.0% decline for Q1 GDP. Forecasts had been for a 0.7% contraction so the kiwi dollar was quick to lose value dropping more than 2 cents against the pound. However, sterling shows no sign of breaking out of the $2.48-£$2.65 range that we have seen over the past three months and investors still believe New Zealand’s economy to be in better shape than that of the UK.
