Tuesday, June 29, 2010

Latest currency update

From our partners at Foremost Currency Group :-


Last week we saw the Euro reach a high of 1.2210, this as expectations of the UK budget would get Britain back on a sound fiscal footing offering more incentive for investors to cover extreme short positions in the UK currency, thus driving Sterling to its strongest level against the single currency in more than 18 months. The Budget announcement by Chancellor of the Exchequer George Osborne on Tuesday 22 June showed the new UK coalition government is serious about tackling its budget deficit, with tough spending cuts looming we could see Sterling supported in the mid-term. The other important news this week was the rating agency Moody's statement on Wednesday that it would see Britain keep its triple-A rating if the government successfully implemented the tightest budget in a generation. This is seen as boosting the appeal of UK assets among overseas investors and helping the Pound, this as the Euro came under broad selling pressure after the cost of protecting Greek government debt against default rose further, emphasising the revival of Sterling more as a result of Euro weakness rather than Sterling strength.

With the growing volatility in the markets the use of a forward contract can benefit you in eliminating risk and safeguarding your funds. The forward option takes time, interest rate differential and volatility in the market into consideration giving you the option of buying live to the markets on the day by paying a small deposit upfront, with a settlement period for the balance of up to 2 years.

Looking to the week ahead the most crucial news may the House price index (HPI) and Gross domestic product (GDP) announcements in the UK on Wednesday 30 June. The House price index (HPI) delivered by Nationwide bank gives us the change in the selling price of homes with mortgages. The HPI is the UK's second earliest report on housing inflation and the impact tends to be significant, as it is a leading indicator of the housing industry's health and because rising house prices attract investors and spur industry activity, however it varies from month to month. The GDP being the broadest measure of economic activity and the primary gauge of the economy's health as it measures change in the inflation-adjusted value of all goods and services produced by the economy; it may prove to be crucial to the GBP/EUR currency pairing.

With the news on the GDP and HPI in the UK and the growing financial crisis in the Eurozone this week is likely to be another volatile one for the GBP/ EUR currency pairing. See the relevant data releases below for a concise round up of volatile market movers; however it is well worth taking the time for a consultation with an account manager here at Foremost Currency group.

Sterling appreciated against the USD last week following Chancellor of the Exchequer George Osborne’s delivery of a tough but balanced budget and although the measures outlined would mean higher taxes and spending cuts investors reacted favourably towards Sterling.
In the emergency budget Osborne revised down growth forecasts for 2010 and warned that unemployment would reach 8.1%. Strength for Sterling came from the tax policy and despite the VAT increase to 20% in January 2011, tax relief measures on corporate taxation and the fact that the VAT increase would not impact fuel costs were both seen as very positive measures to support economic recovery and stimulate industry in the UK. Further support came from the Fitch rating agency who called the UK budget a ‘strong statement of intent’, rating agencies in the past have heavily criticised the UK debt levels and the positive statement encouraged investor confidence. Moody’s rating agency followed suit the following day and provided additional market confidence after it released a statement saying they felt the UK budget was broadly in line with expectations and addressed all the major concerns on economic growth.
The only other positive remaining event for Sterling last week was the Bank of England minutes that revealed a surprise 7-1 voted on interest rates. MPC member Andrew Sentance voted for a rate hike. Sentance also went on the say that he felt despite current uncertainties it was appropriate to begin to gradually withdraw some of the exceptional monetary stimulus. The minutes boosted Sterling across the board as traders priced in the possibility of future rate hikes and investor risk appetite increased.
Economic data from the US created some safe haven buying of the Dollar as investors questioned whether the European debt crisis had some impact in slowing the US recovery. US Q1 GDP dipped slightly lower than expected but was offset by a strong increase in consumer spending and sentiment, the Federal Reserve Bank kept interest rates unchanged at 0.25% and made no changes to inflation or growth forecasts. Speculation regarding the G20 and mixed economic data was clear as a change in sentiment could be seen in GBP/USD levels as the Dollar closed the week trading near its weekly lows.
In the coming week markets will open to the G20 meeting, although the likelihood of a definitive statement addressing the European debt crisis is unlikely, a lack of unity could unsettle the markets and allow for safe haven buying into the Dollar. With Market confidence restored after last week’s budget announcement and the commitment from the UK government to take aggressive measures to reduce Britain’s deficit, Analysts are now concerned that the lower spending power could have a negative impact on growth and as such could cause further volatility for Sterling. Former BoE member David Blanchflower recently warned of the possibility for a double-dip recession in the UK and this could add to market jitters ahead of the GDP release. For an in depth view into what may affect your currency requirements please see our market data section below and/or contact your FCG account manager for a personal consultation.
This Weeks Data

The weekends G20 meeting will likely have an impact this week, as the EU debt crisis was the focus of discussions over the weekend. Last week we hit a 19 month high against the Euro and a 6 week high against the US Dollar. Any announcements could cause volatility in rates. If a clear plan is agreed to assist the EU that appeases the markets, the currency could strengthen and GBP/EUR rates could fall back away. If however no clear plan is agreed, and investors remain wary of investing in the Eurozone, we could see the Euro continue to remain weak and good buying levels remain.

The main fundamental data for the week is as follows:

Inflation data from Germany the main news today, which is an indicator to measure inflation and changes in purchasing trends. A high reading may cause GBP/EUR rates to fall. Elsewhere we have house Price data for the UK that gives an idea how the overall economy is faring. In the USA we have core personal consumption which again is an inflation indicator.

Today is all about confidence, and the focus is on the EU. We have consumer confidence, industrial confidence, Economic confidence and services confidence. If the measures show they are confident then the Euro may gain. There’s not much to be confident about in the EU at the moment, but developments from the G20 meeting may change this. Later in the day we have UK consumer confidence.

More significant data today – from the UK we have Gross Domestic Product. GDP is considered as a broad measure of the UK economic activity and health. Generally speaking, a rising trend has a positive effect on the GBP, while a falling trend is seen as negative. Unemployment measures from Germany and the US today should also be taken into account.
Inflation data is the only UK release of note. With the BoE minutes last week showing a vote for higher rates, a high inflation reading could cause the Pound to rally slightly. Building permits from Australia and commodity prices from New Zealand may affect the antipodean currencies today. In the US, various jobless measures may affect GBP/USD rates.
Producer Prices from the EU will give an indication of future interest rate movements in the UK. There are also unemployment measures for the EU that may affect GBP/EUR rates. The most important release is the non Farm Payrolls from the USA. As these are so hard to predict, the figure often is significantly different than forecast and so can cause big swings in GBPUSD rates. If you need to buy or sell Dollars, speak to us before this release to ensure you are protected.

For more information on the information contained in this report, contact us today:

Tel: 01442 892060
Web: www.foremostcurrencygroup.co.uk

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