The currency blog

Revising UK GDP figures up a fraction has made little impression on the overall range of the pound although it is encouraging to see the sterling euro rate holding at 1.215 at the close of trading 27/08/10. Perhaps worryingly, the improvement in the pound may now have an adverse affect on UK exports which were a factor in the improved figures. Importers have a little respite with this more attractive level. Germany’s industrial figures still give the UK cause for concern in the short term, and unemployment in the UK is playing on the government’s mind, but retail sales figures show that the consumer, although shrewder, is not daunted by the austerity measures that have animated political discussion of late.

July and August are traditionally slow months in the retail money markets; however this year has shown a 10% increase in interest in overseas buys. Although some would argue that the UK banking sector does not deserve a holiday, it would seem that financial earnings figures, and a the relative evaporation of risk aversion, will find the pound at a more or less stable level come Tuesday. Next week does see weighty information released from the United Kingdom, but as we have seen over the past four weeks, sterling buyers are still keeping the UK afloat and this may transalte into an attempt to breach the higher 1.22 resistance level if the datas prooves positive.

Forecasters working with some of the larger ratings agencies have surprised the market by suggesting that the pound may come under significant pressure before the end of the year. Whilst the Chancellor had been applauded for taking the plunge and cutting public spending, austerity measures in the UK will undoubtedly affect growth in the UK economy which puts the UK at a disadvantage when compared with the more robust US and European forecasts. Despite this thought the pound has moved higher against the euro over from Friday, with an opening bid of 1.2664 for Monday 23rd.

Britain’s retail sales figures released on Thursday do suggest that inflation rises have not deterred consumers, plus weakness in the pound has attracted improved tourist activities, however Britain is not nearly as flexible as her European competitors when it comes to extending visas to the newly mobile consumers arriving from the far east, and as the summer draws to an end it has been suggested that we will see a decline in like for like figures as UK residents tighten the purse strings.

August is a usually a quieter time, but one hopes that rates above 1.20 will tempt buyers to considering exchanging at this improved level. The temptation is always to speculate further, but hardly any of the fiscal or monetary policy measures that have been proposed to deal with credit or inflationary issues will have positive effects for the Brit buyers in the short term. Autumn will continue to prove and uncertain time for the UK and the pound.

Over the past 72 hours the sterling euro rate has moved painfully little. The average range over the latter half of this week for this usually animated currency pair has been a mere 85 points, meaning that traders have either been waiting to buy or sell based on unforeseen economic data, or other markets have attracted their attention. This other market/currency is the US dollar. USD has taken a beating against both the pound and the euro on the back of poor unemployment figures, and in anticipation of sluggish growth going forward.
Mervyn King wil be speaking later on next week, and hopefully this will ignite interest in European transactions. UK financial earnings have been positive overall, and this may have helped to hold the pound at around the 1.20 level, but the pound will no doubt come under pressure over the course of the next trading week, and the markets will wait with baited breath to see what sentiment Governor King chooses to express. He will make a point of mentioning the level of lending to SME’s and individuals, and with banks such as RBS widening their profit margins it seems that pressure regarding capital adequacy is coming to bear and affecting borrowing criterion.
The Germans seem to be emerging from something of a lull which suggests that next week could prove euro positive up to a point; at least we should see some movement after what has been a distinctly uninspiring five days.  Interest rate remain the same which is unsurprising at this point in the annual cycle, however, speculation of the timings of a rate increase has genuinly split opinion leading to inertial in short term trades.

With sterling and euro sticking within a predictable range, averaging about a cent oscillation over the last four UK and European sessions, it is clear that the summer lull is in full flow…

The pound closes up at 1.2028 by the end of trading on Friday. All eyes appear to be on the dollar which has been hit hard by gains against both the euro and the pound. US GDP did not reach the levels that were expected. When contrasted with the GDP figures released from the UK one can argue that sterling has had a bit of respite as attention had turned towards Ministers in Europe and US. Sterling may move decisively over the next week or so. Speculators anxious to push levels are likely to capitalize on negative Eurozone sentiment, so we may see the 1.21 level tested, and when one considers that the first week of this month will be rich in data, we should hold tight for a surprise shift to a more positive out look for the pound in the long run.

Sterling and the Euro have been dancing between the 1.1650 - 1.1950 range for the better part of the last fortnight. Compared with the splurge of information released at the beginning of both May and June, July has seen an evenly weighted battle between these two currencies; UK growth has kept euro under pressure, and the most recent stress tests for European financial institutions have brought inconsistent sentiment to the market. We don’t really know what stresses we tried on Europe’s banks, or the criteria by which a bank might pass or fail. City pundits have suggested that the stress tests themselves are a hollow exercise that serve only to suggest that the Eurozone is prepared to address reckless risk taking; but what is being testing? Have these steps gone far enough, and what will happen to those banks who are primed to reveal losses and liabilities later in the year but meet the requirements of these tests at the moment?
These questions are just some of those which have undermined confidence in the euro over the past week to ten days. The decision rests with investors and traders, and after Europe and London’s closes on Friday 23rd sterling was seen to improve taking its high for the day up to 1.2019.
Monday will be interesting. Politically and economically the UK can adopt the high ground as our GDP figures do show some positive signs, and our austerity measures have been applauded globally; however the market is fickle, and over the next two weeks we will have to weather attacks from European regulators, speeches from the BoE’s Govenor and housing figures that may reveal just how averse to risk high street lenders have become…

Sterling has done its best to hold form above the 1.18 level before Friday’s close, but the slide from 1.20 over the last 12 hours is symptomatic of a market uncertain about the worth of imminent stress tests, and the long term implications of European regulatory changes such as the Alternative Investment Fund Management directive.
Germany and France have adopted something of a ‘dog in the manger’ attitude, and seem willing to risk the movement of key fund and asset management services to the Far East in order to provide a more even European playing field. Measures like the AIFMD will have a negative effect on European and London based trading, and wealthy tax payers will leave the EEA and UK for softer structures off shore in countries like Singapore and Hong Kong.
Key figures in the banking sector have firmly stated that the upcoming ‘stress tests’ will not, if weathered, signify a clean bill or health; and issues such a deflation, high levels of government debt and a spike in investment interest rates because of said sovereign liabilities still plague the markets and undermine confidence.
Sterling has settled to the 1.18 level, and this was to be expected after such a frantic rally following the May election and the Budget in June. 1.20 is still achievable, but with luke warm economic data it will be difficult for us to find support above this key level in the coming weeks.