The currency blog

The markets had an optimistic start yesterday buoyed with the positive news that France and Germany posted positive Q2 GDP numbers at +0.3% respectively. The news rallied the markets with sterling and the euro both making some gains against the USD; the FTSE also hit a 10 month high. GBP/USD made a move back above 1.66 and EUR/USD to 1.43 as appetite increased. The mood changed in later trading as US data came in weaker than expected. US retail sales posted lower at -0.1% and weekly jobless claims rose by 4,000 swinging the market back into more caution with USD gaining back.

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Official data this morning has confirmed that Q2 GDP has come in positive 0.3% for both France and Germany- far better than expected and very surprising against a back drop of heavily contracting GDP for the nations at the back end of 2008 and early 2009. In addition Eurozone GDP has just come in at -0.1% much better than the forecast of -0.5%- this means that the Eurozone as a whole is nearing a turn to positive growth. In the markets the euro has gained a little against the USD but no move at all against the pound. Personally I thing the good numbers should be taken with a pinch of salt as the GDP gains could align to stimulus input over a real turn in demand. Recently we saw that Eurozone Industrial Production fell 0.6% with falls noted in France and Germany and credit conditions remain tight- especially in Germany. I feel we need to look for more economic feedback to substantiate this gain in GDP before we can declare that France and Germany are on the road to recovery.
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Already this morning we have had the release of eagerly awaited jobless claims and UK unemployment. UK jobless claims came in better than expected at +24,900 against expectations of +28,000, however the ILO unemployment rate nudged up to 7.8% from 7.6% against the expectation of 7.7%- worse than expected. No move in the markets as yet- we have seen a sell off in sterling ahead of today so to a large extent negativity has already been factored in. The market will also be focusing mainly on the Bank of England’s quarterly inflation report and we will wait to hear substantiation of last weeks expansion of QE coupled with growth and inflation forecasts. The tone is expected to be dovish and could lend to further weakness in the pound, however if the Bank close the door on further monetary stimulus we should see a bounce in the pound….

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The pound suffered heavily in trading yesterday and has continued on a weak tome this morning. Yesterday the pound fell against the USD,EUR, JPY, NZD, AUD- so basically across the markets. The reason for the fall in the pound is down to the factoring in of negative feedback from the UK economy tomorrow from the UK Quarterly Inflation Report and from UK unemployment data. The quarterly inflation report is expected to emphasise a downgrade in growth forecasts for the UK and to highlight why the expansion of QE by £50 billion was deemed necessary. The UK unemployment data is expected to show further rising unemployment in the UK as we approach unemployment levels of 2.5 million.

GBP/USD retraced from 1.67 to 1.645 and GBP/EUR dropped from 1.1770 to 1.16. Sterling also slipped under 160 against the Japanese Yen, hit a Feb 2008 low against the NZD at 2.4337 and hit lows not seen since 1997 against the AUD of 1.9622.

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I moved to Spain with my family over six years ago, having known the country since the days of Franco. My mother is a poet and has lived here for the past forty years and so I have always looked upon Spain as my second country. When, by chance, I was asked to work here I jumped at the opportunity and came to live in Spain permanently.

In fact, moving to Spain has turned out to be an inspired choice, not just for me but also for my family as well. Indeed, as every year passes, we seem to enjoy life here more. In a way, this has been a surprise, possibly because Spain is such a deceptive country. On the surface, to the casual visitor, Spain can appear to be little more than a banality of fine beaches and great bars - with a dose of Flamenco and guaranteed sun mixed in. However, this is a false impression.

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On Friday we saw the much anticipated US non-farm payroll numbers come in far ahead of expectations. The number of job losses in July came in at -240,000 against a forecast of -325,000. This was a huge lift for the markets and the US economy following 19 months of dire payroll numbers. As anticipated the Dow and the FTSE rallied on the news as investor optimism increased; however in the currency markets we did not see the typical play into risk appetite trading and USD weakness. Initially we did see the USD weaken against the Euro and the Pound, however this weakness was short lived and the USD rallied back considerable across the markets. So what does this mean? Well it could mean a change in sentiment for the US economy whereby it no longer weakens on good news- the key driver for this is the anticipation that the Federal Reserve may now look to raise interest rates sooner than other major economies and is better placed to do so. The economic data also helped to comfort the markets to viewing that the Fed will not look to expand (like the UK) its current measures on QE and ultimately that the economy is out of the deep water it was once in. It is still early days but a very good number nonetheless and could mark a turning point. GBP/USD filtered down to 1.66 and EUR/USD down to 1.4155.

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