Sterling outlook gloomy

The Pound continued its poor start to the week yesterday with exchange rates continuing to slide across the board. These losses can be attributed to a number of factors but especially the run up to this weeks Bank of England interest rate announcement on Thursday. The likelihood of any interest rate rise is minimal but the rumours of a second phase of Quantitative Easing measures being announced are getting louder and louder.

Quantitative Easing

What is the reason for and impact of Q.E.?
The idea behind Q.E. is simply to increase the amount of money in the UK economy in the hope of, amongst other things, it filtering through the system and reigniting the housing market, increasing retail sales and in turn reducing unemployment. The problem so far has been UK banks reluctance to lend out this extra money with the aim of improving their own financial position and balance sheets, hence why further measures may be necessary.

The impact of Q.E is fairly serious, with this huge volume of extra money available in the system people, in time, will have more money to spend. The theory of supply and demand tells us that the more people have the more they want things, the more people that want things the more expensive they become............inflation!!!

The principal way of controlling inflation is to increase interest rates and with such a huge volume of extra money in the system, inflation could climb rapidly meaning that interest have to climb equally steeply!!!

Australian Dollar continuing to strengthen

Overnight the Reserve Bank of Australia increased the national interest rate to 4%, the fourth time they have increased the cost of borrowing in 6 months. This will undoubtedly give the Australian Dollar further strength.

Over the past 12 months GBPAUD exchange rates have dropped by in excess of 60 cents from 2.25 to its current level of 1.65, that s a difference of AUD 120,000 on a conversion of £200,000!!!

The strength of the Australian economy is mainly as a result of it virtually avoiding recession and therefore being used as a flight to safety for those with concerns about the security of their savings. Since then more and more investors will be putting funds into the Australian economy as a result of them having higher interest rates and therefore greater yields.

It really does appear that the early bird really is catching the worm, over and over again!!

Uk recession over but the Pound still struggles

Revised GDP figures out on Friday reconfirmed the UK's economy had scraped it's way out of recession in the last quarter, growing by an upwardly revised 0.3%, more than had been previously forecast.

This, I thought, would have given Sterling some well needed strength after a pretty poor week, but it didn't. The Pound continued to lose ground throughout the day, ending the week 2.64% below the week high agains the Euro (when moving £200,000 into Euroland this equates to over €6000!!) and 2.68% against the US Dollar.

UK recession set to continue?

Tomorrow at 9:30am the latest official revised figures for UK GDP will be announced. As most of you will be aware the UK exited recession in the 4th quarter of 2009 with a weak 0.1% growth and analysts are optimistic of an upward revision of this figure to 0.2% growth. One of the major threats to the value of Sterling at present is the possibility of a ‘W shaped’ or ‘double-dipped’ recession where the economy is at risk of falling back into recession before sustaining a full recovery. Germany are already at risk of this as their revised GDP figures released yesterday morning saw a drop from positive growth of 0.7% down to zero growth and I personally fear that the UK may find itself with a similar struggle.

In my opinion the importance of tomorrow’s release means that the markets are ready to react one way or another and I believe that should we see expectations of 0.2% growth or better then we could see a Sterling spike offering some better buying exchange rates across the board. However I believe that a result of 0.1% or worse could be catastrophic for Sterling…

Exchange rates this week

Yesterday was a relatively quiet day for the market but we do have plenty of data coming up this week that could affect your currency transfer whether buying currency with sterling or bringing funds back into the UK. For anybody with a GBP/EUR or GBP/ USD requirement this is particularly the case. In my opinion the biggest data set for GBP/EUR this week will be German GDP figures due for release on Thursday, this thought is echoed by other industry specialists:

“The German GDP figure out tomorrow at 09:30 could be the key factor as to how Sterling Euro fares this week, with it being the largest economy in the Euro zone and following the problems in Greece a lower than expected figure could provide excellent buying opportunities.” Tom Higham, Director at Foreign Currency Direct

With Germany being the largest economy within the Euro zone its GDP figures will be closely scrutinised and I would expect GBP/EUR volatility following this release.

For those interested in GBP/USD US Non-farm payroll unemployment data released on Friday is viewed as a very important release for anyone following cable. USD exchange rates have been performing well recently against a number of major currencies including Sterling and the Euro and should these unemployment figures be better than expected we may see this trend continue, possibly worth holding on should you have dollars to sell.

Is Brown a bully?

The Labour party have taken a very offensive stance after an anti-bullying charity announced at the weekend that staff from Gordon Brown's offices had contacted them.

Downing Street says the reports are "malicious allegations" and "without foundation" while the PM's secretary has immediately asked for evidence from the charity that the questions have really come from staff at No.10.

Gordon Brown has previously been warned about his behaviour towards staff by civil service head Sir Gus O'Donnell.

The problem the Government now face have is whether or not the allegations prove to be true, Gordon Brown has been labelled a bully in most newspapers in the run up to a General Election!!

Political instability is very much one of the key factors that affect the value of Sterling against other currencies and I'm sure that this will not be the last incident of mud throwing or scandal during the upcoming weeks so the Pound could be in for a really rocky ride!!

If you want to have a chat about market conditions and forecasts give me a call on 01494 787457 or email me at sah@currencies.co.uk

Currency News

With the Greece situation smouldering in the background whilst it gets on top of its troublesome deficit there are lot of economic releases to make for an interesting day. We have already seen the Bank of Japan hold interest rates steady this morning. Later sees UK public sector net borrowing for January released at 09:30. With the already very large UK deficit this is one release that should be keenly watched and is likely to shape the sterling markets today.

Forecast is actually for an improvement in the figures with a reduction of £2.5 billion. However seeing the deficit expanded the previous month by £15.7 billion then this forecast from my view is a little on the optimistic side and we could see a reversal of the good gains the pound saw yesterday.

At the same time M4 money supply data is also released measuring all the money in circulation in the UK. The Bank of England will be hoping to see some growth in the figures and most are expecting a small increase of about 0.5%. However, with a growing belief that QE isn’t having the desired effect and the fact that the money supply actually shrunk by more than 1% last month then we could be in for a nasty surprise.

With two very important releases this morning, for anyone with any currency requirements it would be beneficial to be in close contact with your account manager should the market move substantially.

It is worth being aware that there are European consumer confidence figures released at 10:00. With a more fragile looking Euro with the problems surrounding Greece at the moment it has the potential to put a dampener on the euro.

Across the pond focus will be on Canada with a number of releases including Consumer Price Index (CPI) for January at 12.00. For the US it is Producer Price data and the Philadeplhia Fed Survey later this afternoon.