Monthly Archives: July 2011
U.K – Sterling GBP
The Pound has had a strange few weeks, continuing to drop away against the Swiss Franc, New Zealand and Australian Dollar, yet gaining back some ground against the U.S Dollar and Euro.
Economic data from the U.K has not been terribly good however not terribly bad either of late compared to many others, the key would be for data to improve, spending cuts to appear to be working and investors to start believing that the Pound is a good currency to hold once again during these troubled times worldwide.
Europe – Euro
Well documented problems in the Euro Zone have led to a shaky time for the Euro of late, we have seen various credit rating agencies downgrading numerous countries, not to mention the ongoing problem with Greece that appear to be merely delayed rather than anywhere near fully rectified.
My opinion on the Euro is that I am merely waiting for big trouble to arise, this may not neccesarily mean that the pound will suddenly gain a huge amount of ground back due to the exposure the U.K has of these countries. I do however expect us to be higher than we are once the cracks start appearing again.
U.S .A – Dollar
The States also are having big issues and with GDP (Gross Domestic product) figures today being revised down it looks like a rocky road ahead. I would not be surprised to see the pound make some gains against the Dollar at times in the short term, however a saying on the market is that when the U.S sneezes the U.K catches a cold so do be a little wary that we could see a ripple effect head this way which in turn may hold back our recovery and hit us against most major currencies.
The Australian Dollar has had a good week following higher than expected inflation figures in Australia leading to the chance of rate cuts disappearing for now and the AUD holding firm below the 1.50 barrier.
Personally, at some point in the future I expect a major movement against the AUD much like what we saw in October 2008 as investors ruch to unwind carry trades and be ahead of the currency market movements, this could lead to a snowball effect and the AUD losing ground rapidly however recovery in the U.K may need to start showing decent signs of recovery first and foremost.
Swiss Franc – CHF
The Swiss Franc has still gone from strength to strength against the Pound and also still appears to be at the forefront of investors minds when looking for a safe haven currency. Surely this cannot continue and sooner or later the fact that Swiss exports will be so expensive it may bring them trouble further down the line. This once again brings back the hope that the Pound takes over the Swiss Franc as the safe haven of choice, and those with sky high Swiss Franc mortage costs can breath a small sigh of relief that things are going back in the right direction.
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Have a great weekend!
Interesting article regarding Growth vs Inflation from FX Street.com They expect the pound to continue to weaken through 2011 :(
FXstreet.com’s analyst Valeria Bednarik says in the article below that the UK “monetary independence is both a blessing and a curse”, good point given the problems over the Eurozone periphery. It seems to be accepted by the market that the BoE is focused on inflation and not the recovery, as the BoE´s governor Mervyn King and Chancellor George Osborne have been busy these last six months.
Looking at the numbers, year-over-year inflation was up around 4.2% in June, leading to speculation of a rate hike which could threaten the economic recovery, as growth remains stagnant with the quarterly GDP at mere 0.5% in Q1.
What happened during the first half of 2011? Too much news and too many decisions from the market, What will happen in the second half? Valeria tell us in the article below “TUG OF WAR: Growth vs. Inflation”. This is the fifth issue of our FXstreet.com mid-year check up series, today delving into the situation in the UK with the Pound as the main character.
Tug of War: Growth vs. Inflation
By Valeria Bednarik, Forex Analyst for FXstreet.com
With the crisis the world is living through right now, if there is something to say about the UK it is that their monetary independence is both a blessing and a curse. Back in 2008 when the financial world collapsed following the US housing mortgage crisis, that economic independence had let the UK act in proper manner, and the BOE quickly reacted by cutting rates, creating the assets purchase facility program, and in general favoring a re-balancing of the economy. Problem is, things haven´t gone according to the plan, despite the huge devaluation the UK is still struggling to recover.
And with growth still remaining mostly stagnant, the recovery path seems harder day after day with overwhelming negative fundamental data and rising inflation.
At one point, we may wonder whether the UK is actually advancing or at the verge of a another financial collapse. Especially if things remain unchanged and Chancellor George Osborne continues to insist that the government hold its nerve by not deviating from his plans to cut borrowing, despite the increasing evidence that this policy may be damaging growth.
Economic Growth Stagnant
The United Kingdom GDP expanded just 0.50% over the first quarter of 2011, compared to the previous quarter. From 1955 until 2010 the UK´s average quarterly GDP Growth was 0.59% reaching a historical high of 5.30% in March of 1973 and a record low of -2.50% in March of 1974.
While among the worlds’ most developed economies, it´s growth has never been close to outstanding, as we see from the previous figures, yet the main reason of the latest disappointing results may be found in a stalling manufacturing sector, a contraction in construction, and a sharp drop in oil and gas extraction. If something is giving support to the Pound these days, it is the strong oil near $100 a barrel. The bottom line is that when it comes to economic growth, the risk remains to the downside in the UK.
When it comes to the labor sector, the unemployment rate was 7.7% back in May. That’s barely above the 7.22% average from 1971 to 2010, so despite it being not a positive figure, at least the sector is among one of the better all things relative. The latest reading in June showed the unemployment rate was down 0.1% over the quarter and 0.1% on the year. Still the report showed there where 1.52 million people claiming unemployment allowances which was an increase of 24,500 from May. In particular, the number of men claiming allowances increased by 15,000 to reach 1.03 million and the number of women claimants increased by 9,500 to reach 493,900, the highest figure since August 1996.
The Minister for Employment Chris Grayling said this month: “There continue to be some encouraging signs in the labor market figures, particularly with the continued rise in private sector employment. It’s really important that we continue to support the economy and encourage businesses to invest and create jobs. However, we do not underestimate the scale of the challenge that we face to help people into employment.”
Inflationary Pressure on the Rise
While the UK has cut down their interest rate benchmark to 0.50% where it has remained steady since March 2009, inflation keeps rising above the BOE´s tolerance limit and was last reported at 4.2% in June over the year. From 1989 until 2010, the average inflation rate in the United Kingdom was 2.72% reaching a historical high of 8.50% in April 1991 and a record low of 0.50% in May of 2000.
While back in May this year, the BOE’s governor Mervyn King said that inflation was “uncomfortably high,” and officials signaled they may need to raise interest rates later this year even as the economy struggles to build momentum. Interestingly however, the fact is that just one month later the central bank turned back towards it´s prior dovish stance, with 7 out of 9 members voting to keep rates on hold. The flip from hawkish to dovish, has come after the committee lost its hawkish member, Andrew Sentance, in May this year.
And while the idea of keeping rates low to jump-start growth remains, inflationary pressure keeps rising. The thing is that the BOE would rather focus on containing inflation, rather than stimulating employment or growth. If inflation keeps rising towards 5.0% as Governor King expects, the BOE will may have no choice but to rise the benchmark in an attempt to control it. At the same time, economic growth will hardly gain traction without the help of the central bank, while the UK continues applying their assets purchase program, or QE, as they can’t remove it but only extend it: the quantitative easing program is another inflation generator for the economy. Up to this point, the tug of war the bank is trapped in will not result in a positive outcome no matter which side wins.
The BOE will have no choice but to sacrifice growth to contain inflation. While a rate hike may be expected by the end of this year, and we usually understand rate hikes as positive for a currency, I won’t be expecting too much strength for the Pound, not even after a rate hike. Unless some signs of recovery start improving the sentiment over the UK economy, the Pound is set to extend its losses over the second half of 2011.
Interesting stuff…. Thanks to www.fxstreet.com
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Today could be a volatile day ahead for sterling exchange rates as we have the release at 9.30 am of the UK GDP figures. The Q2 gross domestic product figures measures the overall economic growth activity by looking at the total cost of all goods and services produced in the UK.
Q1 of this year showed economic activity grew by 0.5% but the second quarter is expected to decline down to 0.2%. At 8.30 am the pound has significantly weakened against a host of currencies most notably though against the Euro where we are down by 0.5% trading at a low of 1.1254. This is more than likely in anticipation that the GDP figures will decline sharply.
If we do see the overal economic activity fall further than expected then, we could see the pound weaken against most majors this morning. The one bright light is that sterling exchange rates are still trading at highs against the USD at 1.6340. If you have a requirement to sell the pound to purchase any foreign currency then I would recommend exchanging your funds first thing this morning as taking the risk that the pound will strengthen could end up costing you in the long run with the state of affairs in the UK.
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European Debt Summit latest – Euro strengthens once again!Investors still seem content that everything is going in to this to save the Euro…
Personally I just cannot believe we continue to see the Euro gather strength, I have seen all sorts of comments today like the Eurozone is like a patient post a major operation and will still need intense help for the recovery along with 24 hour care… that was my favourite!
The general feeling right now is that investors are feeling comforted that everything including the kitchen sink has been thrown into a solution but my opinion is just what do they do next when this doesn’t work?.. surely they are completely up sh*t creek without a paddle and this whole thing is really going to blow up.
The Euro may hold firm in the short term due to Chinese buying, general investment and the halo that currently somehow is staying above it, however I feel we are now looking at Europe carrying out a major plate spinning excercise – sooner or later one of the plates will fall and we all know the Greeks love to smash plates!
If you have a pending transfer and really would like to know just what is happening and why, along with ensuring you get the very best rate of exchange you can for your transfer contact me directly email@example.com or call me during office hours on +44 (0)1494 787 462 I will be more than happy to help. Media quotes are also welcome just feel free to get in touch.
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Just a quick one for all regular readers that do have currency transfers and have not yet got in touch… I have just conducted a survey on my last 500 currency trades, not all clients have responded however these are the results I received… you should be getting in touch!!
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What will happen with the Euro going forward from here. At the end of last month Greece’s parliament had a key vote to push through severe austerity legislation to ensure that bailout funds from the EU/IMF keep the economy from collapse. Around this time the Euro strengthened and started heading towards the 1.10 level verses the pound. Since then the Euro has weakened slightly and we have been trading near a 6 week high recently.
This afternoon there is an emergency summit in Brussels where Euro zone leaders will try to overcome divisions and complete a second rescue for Greece.
German Chancellor Angela Merkel has warned that the talks may not produce a solution to the problem, which has markets worried that Athens may default on its 350 billion euro debt and spark a chain reaction through the EU. And last night the head of the European commission Jose Manuel Barroso stated that the situation is very serious and the consequences of no resolution will be felt all over the globe.
The problem with the summit is that EU officials are struggling to agree on measures as to how to fight the crisis. As they do not seem to have a definitive resolution to stop contagion spreading, the summit will certainly bring up the question IS THE EURO WORTH SAVING?
The IMF poured further fuel onto the flames of the Euro zone’s debt crisis as comments by the organisation revealed grave concerns about the future for Europe’s single currency. They highlighted a ‘serious risk of contagion’ if Greece, Ireland and Portugal failed to keep to the terms of their respective bail-outs and were unable to keep to honor their debt commitments. They predicted ‘major global consequences that would be extremely costly for the world’ if such a situation occurred.
What all this mean for your currency exchange is that today’s global currency markets will be extremely volatile and you would be wise to place stop loss and limit orders into yoru currency exchange. if you have upcoming currency requirement please feel free to contact me on 0044 1494 787 474 Just ask for Ben and I will explain the options that are available to you going forward.
At the moment, the Euro is managing to avoid a major sell-off, on the hope that a resolution can be put in place. If there is no agreement on how to bailout Greece then I would expect to see the pound make a near-term rally near to May’s high.
Quick update on the minutes this morning…. the members of the MPC voted 7-2 in favour of no interest rate hike this month, and 8-1 against any further Quantitative Easing for the time being.
Both pretty much cancelled each other out and the pound if anything may have risen ever so slighlty.
At 09.30 am we have the Bank of England (BoE) minutes which could show some sterling weakness following all the recent indicators pointing towards a slowdown in the rate of growth for the UK. Q1 2011 saw the economy grow by a meagre 0.5% and the expectations for Q2 are for this to be lower, some analysts think that there may even have been a contraction in the economy.
The Minutes will reflect the voting procedue from the actual rate decision meeting 2 weeks ago. We know there was no actual change in policy by the BoE, but it will be interesting to see if there has been a change in how the members are viewing the future direction for economic policy. If there are further indicators that economic growth is shrinking we may find we need a further round of Quantitative Easing whereby the government ‘inject’ money into the financial system to stimulate economic activity. Last time this happened we saw major downward movement for the pound and there merest mention today could trigger a sterling slide.
GBPEUR is over 1.5 euro cents down from Monday’s highs of 1.1485. This is due to expected weakness for the pound in next week’s GDP figures (which is hurting the pound against most majors) and investors being cautious of dropping the Euro until they see the outcome of Thursday’s Emergency Eurozone Summit, the official agenda of which is ‘The financial stability of the euro area as a whole and the future financing of the Greek programme’. This underlines the severity of what is on the cards for Europe and the effects of any action or inaction could majorly affect not only euro rates, but also the US dollar and other commodity currencies like the Aussie and the CAD as investors attitude to risk wanes or improves.
Don’t get caught out gambling on exchange rates. The authors of this blog are specialist currency brokers who can personally assist you in maximising your currency trades. We aim to ensure you have all the information you need to make informed decisions and make sure benefit from market volatility not suffer. If you wish to discuss anything further please get in touch.
This week in my opinion the Bank of England minutes (released at 09:30am Wednesday) are going to be key to Sterlings performance, the minutes give an overview of the last interest rate decision, along with how members voted.
I’ve just returned to the office following a bout of tonsilitis which certainly knocked me for six to see that the Pound had actually had a reasonable week against most majors last week. The usual suspects gained (NZD and CHF) however aside from those two it was refreshing to see some gains.
The thing to be wary of is the mention of further Quantitative Easing, it seems that every time we hear about even the potential of QE in the U.K the Pound plummets. If you have an upcoming transfer go carry out it may be worth considering the various options available to you before this release including a forward contract, stops and limit orders.
If you would like me to fully explain these and help you maximise your currency transfer then email me directly email@example.com or call 01494 787 462 and ask for Daniel quoting Pound Sterling Forecast.