Sterling / Euro and US Dollar exchange rates

The Pound rallied against the majors, rising to daily highs versus the Euro, U.S Dollar and Australian Dollar, after the Bank of England interest rate announcement at midday on Thursday. The MPC has sanctioned a further £50 billion of bond purchases, taking the total amount of quantitative easing to £375 billion, as officials look to limit the impact of the Euro-zone debt crisis on the UK economy.

The outcome of the decision had largely been factored into the market. There were suggestions that the MPC wouldn’t act this month due to the recent positive tone of economic reports on manufacturing and service sector growth. However, the UK economy contracted in the fourth quarter and the BoE have taken the decision to implement further quantitative easing in anticipation of a technical recession.

There was a sense of relief that policy makers only sanctioned £50 billion worth of bond purchases, amid speculation that a greater amount could be announced and the Pound subsequently rallied as a result. The UK currency reached a high of 1.1980 against the Euro, prior to the ECB interest rate announcement and the Pound declined towards the close of trading last night, as news broke that Greek leaders had reached an agreement on austerity measures needed to warrant a bailout.

The Bank of England also kept interest rates unchanged at 0.5% and in the accompanying statement, the bank stated that weak economic growth was likely to push inflation below the 2% target over the next two years and there was also speculation that the outcome of the two-day meeting was not a unanimous decision. In terms of economic data, the latest PMI manufacturing data showed positive growth five times as much as initial forecasts for December, which will provide optimism that the economy is recovering from the fourth quarter slump.

Factory output increased 1% from the previous month, despite initial estimates of a 0.2% rise, while a separate report showed that the UK trade deficit narrowed by more than half to £1.11 billion, the lowest level since April 2003. The reports combined point to an improving economy and the end of the year when the economy contracted 0.2%.

The Pound declined against the U.S Dollar and the Euro towards the close of trading, as a report from the National Institute for Social and Economic Research released a report, which showed that the UK economy contracted in the three months to January, supporting the case for the Bank of England to continue monetary easing.

Euro / US Dollar exchange rates

The Euro was unable to break resistance in the region of 1.33 against the Dollar, ahead of the key events yesterday and drifted weaker, as funds looked to trigger stop orders below 1.3250. As well as caution ahead of the ECB meeting, there was also substantial tension surrounding Greek negotiations. The Central Bank left rates on hold at 1% and in the press conference, the chairman Draghi refused to comment on the issue of Greek bonds.

Ahead of the Euro-group meeting in Brussels, the Greek government stated that it would accept the conditions for a €130 billion second loan package to prevent a debt default. The government will still need to find an extra €350 billion in savings to meet the criteria for a bailout and will also need a parliamentary approval for the measures.

Two coalition party members resigned immediately following the deal and there will inevitably be hostile reactions within Greece. This level of uncertainty prevented the Euro from gaining much traction and it again failed to hold above the 1.33 level. In the U.S, the jobless claims data was better-than-expected, reflecting the recent positive outlook of the labour market.

Today’s Exchange Rate Data

U.K 09:30 – Producer Price Index (January) – Output

U.S 13:30 – International Trade Balance (December)

U.S 14:55 – Prelim Michigan Sentiment (February)

U.S 19:00 – Federal Budget (January)

Sterling / Euro and US Dollar exchange rates

The Pound declined further against the Euro yesterday, dropping under 1.20 to a low of 1.1906, ahead of the Bank of England interest rate announcement this lunchtime, with speculation that policy makers will sanction further quantitative easing. The single currency also rose to an eight week high versus the U.S Dollar, amid speculation that Greek officials are getting very close to an agreement on austerity measures needed to warrant a second bailout.

The UK currency also lost some momentum versus the U.S Dollar, as the prospect of further quantitative easing reduces demand for higher-yielding assets. The recent economic data in the UK has pointed to growth in services, manufacturing and construction in the past month and that may prevent the MPC from announcing an extension to the bond purchasing plan just yet.

The Pound was unable to sustain its momentum above 1.59 against the U.S Dollar and traded sharply lower through the course of the day with a test of support close to 1.58. The near-term Sterling direction will be strongly influenced by the extent of any additional bond purchasing and an aggressive stance would tend to trigger initial selling.

There were broadly supportive comments from Standard & Poor’s, especially on the flexible exchange rate, which should help keep any rating cut fears at bay in the short-term. There is speculation this morning that the Bank of England will pump another £50 billion into the UK economy today, despite the recent improvement in UK PMI’s.

That would raise the target bond purchases to £325 billion, more than a quarter of current outstanding gilts. There is a chance of a bigger increase of £75 billion and the decision will be announced at midday in London. There is also economic data due for release today with industrial production data due for December and trade balance figures.

Euro / US Dollar exchange rates

The Euro rallied to a two month high against the Dollar and the Yen on speculation that EU finance ministers will meet today and approve a second round of financing for Greece, which would boost demand for European assets and support the Euro. The single currency was confined to narrower ranges, as technical factors tended to dominate.

Greek negotiations continue amid a series of rumours that a resolution is close to being agreed, but still nothing official. The Prime Minister Lucas Papedemos announced there was an outline deal on all aspects of the agreement except for pensions. Tensions will remain high today ahead of the ECB interest rate announcement and accompanying press conference.

The ECB will probably leave interest rates on hold at 1% but the comments from the Chairman Draghi will be closely watched for any hints of a rate cut, together with the commitment to bond purchases and long-term repo operations. There were no major U.S economic data releases through the course of the day, maintaining the focus on Fed comments about further quantitative easing.

Today’s Exchange Rate Data

U.K 09:30 – Industrial Production (December) – Manufacturing

U.K 09:30 – Trade Balance (December) – Non EU Trade

U.K 12:00 – BoE Interest Rate Announcement

EU 12:45 – ECB Interest Rate Announcement

EU 13:30 – ECB Press Conference

U.S 13:30 – Initial Jobless Claims (w/e 4th February)

U.S 15:00 – Wholesale Inventories (December)

U.K 15:00 – NIESR GDP Estimate (3 Mths to January)

Last Week

Last week was relatively uneventful on the data front, with three separate UK surveys delivering mixed results; the Manufacturing and Services sector surveys convincingly beat expectations, printing at 52.1 and 56.0 respectively, while the PMI Construction survey disappointed, registering at a lowly 51.4 (figures above 50 indicate growth). In the US the main data items were focused on the labour market, with all indicators pointing to a slight improvement in the employment situation. Probably of more relevance was an improvement in sentiment toward the Euro that tended to work to the detriment of the Dollar.

Today’s UK balance of trade figure showed a deficit of £7.1bn, although this was somewhat better than the £8.6bn expected. Manufacturing and industrial production figures also came in better than expected this morning and Sterling has perked up slightly in the minutes since these releases.

Heads Up

*Denotes the importance of the data item *** being the highest level.

*** The key UK data release this week comes at lunchtime Thursday, when the Bank of England Monetary Policy Committee announces its interest rate/asset purchase scheme decision. An upping of the current £275bn allocated by the Bank to its QE programme would be likely to damage the Pound. The market sees a good chance of an increase to £325bn.

*** The ECB also announce their latest interest rate decision at 12:45pm Thursday. We expect rates to remain on hold at 1.0%.

** The closely-watched NIESR GDP Estimate for the UK is released on Thursday afternoon. If the monthly figure for January beats December’s counterpart number of 0.1%, then Sterling will be supported.

** Federal Reserve Chaiman Ben Bernanke gives a speech at 12:30 on Friday

** US December trade balance is out at 13:30 on Friday with a $48.2bn deficit expected.

Outlook

Sterling has managed to make new highs four weeks on the trot. Yesterday’s push above 1.59 was swiftly rejected but we appear to have found some support at 1.58 this morning. Having taken out the Nov/Dec highs around 1.57 and convincingly held onto this ground the next natural target is the October 2011 high at 1.6150. A break above there would be very positive for the medium term trend. On the downside a failure to hold onto the 1.57 level would be considered cause for concern.

Last Week

Last week was relatively uneventful on the data front, with three separate UK surveys delivering mixed results; the Manufacturing and Services sector surveys convincingly beat expectations, printing at 52.1 and 56.0 respectively, while the PMI Construction survey disappointed, registering at a lowly 51.4 (figures above 50 indicate growth). The equivalent Eurozone figure for manufacturing came in at 48.8. German retail sales unexpectedly contracted in December, helping the Pound to climb back above 1.20, and despite some weak data on the UK housing market Sterling ended the week seemingly poised to go higher. When markets became active again on Monday morning we did go higher, briefly touching 1.21 before turning tail and sliding through the course of the week right back to 1.19 where we trade this morning. Sentiment toward the Euro received a boost as forward looking indicators painted an improving outlook. A Eurozone investor confidence survey rebounded strongly in February, with German factory orders also rising more than expected. These were enough to overshadow a very weak German industrial production figure for December. The German balance of trade figures released yesterday showed a €13.9bn surplus for December. This compares to today’s UK figure which showed a deficit of £7.1bn, although this was somewhat better than the £8.6bn expected. Manufacturing and industrial production figures also came in better than expected this morning and Sterling has perked up slightly in the minutes since these releases.

Heads Up

*Denotes the importance of the data item *** being the highest level.

*** The key UK data release this week comes at lunchtime Thursday, when the Bank of England Monetary Policy Committee announces its interest rate/asset purchase scheme decision. An upping of the current £275bn allocated by the Bank to its QE programme would be likely to damage the Pound. The market sees a good chance of an increase to £325bn.

*** The ECB also announce their latest interest rate decision at 12:45pm Thursday. We expect rates to remain on hold at 1.0%.

** The closely-watched NIESR GDP Estimate for the UK is released on Thursday afternoon. If the monthly figure for January beats December’s counterpart number of 0.1%, then Sterling will be supported.

Outlook

Since posting an 18 month high on January 8th Sterling has spend the last month consolidating within a couple of cents of that high. The trend is therefore still in favour of a stronger Pound. However, the 1.1850 – 1.1900 zone had become a key psychological floor during this consolidation phase, so we would become concerned if Sterling fails to find buyers at this level and slips through 1.1850. Buyers of the Euro should keep in touch and be ready to cover any exposure (and lock in the recent gains) on signs of further weakness.

Foreign Currency Market Update – GBP / ZAR Update

The GBP ZAR exchange rate has continued on its downward trajectory over the past seven days, causing the pair to trade as low as 11.8875 just before global currency markets closed on Friday night. This was the lowest level that the pair has traded to since 19th September. 2011. Last November’s high of 13.3578 now seems a distant memory – July 2011’s low of 10.6405 would appear a more likely target if the pair continues trending downwards.

Last Week

Last week was a relatively quiet one for UK data releases, with three separate PMI surveys delivering mixed results; the Manufacturing and Services sector numbers convincingly beat expectations, printing at 52.1 and 56.0 respectively, while the PMI Construction survey disappointed, registering at a lowly 51.4. Elsewhere, there were worrying signs for Britain’s housing sector, with December’s Mortgage Approval data and January’s Nationwide house price survey both coming out lower than expected. Meanwhile, the Rand’s relative strength on the week was determined by data releases outside South Africa, as is often the case. Friday’s key US Non-Farm Payroll numbers showed that 243,000 new jobs had been generated in the States last month. This figure far exceeded expectations, seeing global share markets register healthy gains, as appetite for risk surged. This benefitted the high-yielding, risk-sensitive Rand more than almost any other of the sixteen most-actively traded currencies.

Heads Up

*Denotes the importance of the data item *** being the highest level.

** Thursday morning sees the release of the latest UK Industrial and Manufacturing Production figures. Industrial Production figures are expected to show an annualised contraction of 3.1%, while analysts expect the Manufacturing Production data to show a return to growth for the sector, following November’s negative figure.

** Thursday morning also sees the release of December’s UK Visible Trade Balance numbers. A deficit of some £8.6bn is expected.

*** The key UK data release this week comes at lunchtime Thursday, when the Bank of England Monetary Policy Committee announces its interest rate/asset purchase scheme decision. An upping of the current £275bn allocated by the Bank to its QE programme would be likely to damage the Pound.

** The closely-watched NIESR GDP Estimate for the UK is released on Thursday afternoon. If the monthly figure for January beats December’s counterpart number of 0.1%, then Sterling will be supported.

Outlook

The GBP ZAR exchange rate has traded below the 12.0000 level, save for a few very brief incursions, since Friday afternoon’s encouraging US labour market data. The longer the pair trades below 12.0000, the more difficult it will become for it to break back above this level. There appears little reason for GBP ZAR’s current downtrend, which has taken us from above 13.3000 as recently as the last week of November, all the way down to 11.8875 on Friday, to cease. A continuation of the current trend would see December 2010’s multi-year low of 10.1931 hove into view as a medium-term target. Conversely, a shift out of risk by global investors, perhaps elicited by a continued failure by Greece’s policy makers to pass the stringent budgetary measures demanded by the EU/IMF/ECB in order for the debt-addled state to qualify for a second bail-out, could see GBP ZAR settle back above 12.0000 once more.

Sterling / Euro and US Dollar exchange rates

The Pound lost ground against the Euro exchange rate yesterday, losing about a cent on the day, while the UK currency also sank to a fresh 27-year low versus the Australian Dollar and declined against a basket of currencies following a report from the British Retail Consortium, which showed that UK retailers suffered their second worst January on record.

Slower economic growth and a worsening outlook meant consumer spending suffered with sales down 0.3% from a year earlier. A separate report from the Royal Institution of Chartered Surveyors showed that the UK property market continued to struggle, amid deteriorating economic conditions, which helped push down asking prices.

The report is the latest to show the sovereign debt crisis in Europe is restraining demand for property and the index follows a report from the Halifax last week, which said prices were down at the lowest level in 2 ½ years. The Pound also declined against the U.S Dollar, as UK stocks slumped, with
investors waiting for Greece’s politicians to agree on fresh austerity measures to secure a second bailout and China said its industrial output may decline this year.

The Euro slumped by the most in a week against the Dollar, as the elusive agreement on Greek spending cuts continues to dominate market sentiment. The single currency recovered marginally after the German Chancellor Angela Merkel and the French President Nicolas Sarkozy proposed setting up a separate account for Greek debt payments in an attempt to reassure creditors.

The Australian Dollar rallied strongly against the Dollar and the Pound, after the RBA unexpectedly left interest rates on hold, raising investors’ appetite for higher-yielding assets. The Aussie Dollar made strong gains against all of the 16 most actively traded currencies, as the Bank indicated that global growth will continue to strengthen. The bullish stance of the RBA came as a surprise following two consecutive months of rate cuts and the move will support the Aussie and risk appetite as a whole.

The Bank of England’s monetary policy committee will begin their two day meeting today with a decision due at midday on Thursday. There has been a moderation in expectations surrounding further quantitative easing this month, which has provided Sterling support, although there will still be caution ahead of the announcement.

Euro / US Dollar exchange rates

The Euro found support in the region of 1.31 against the U.S Dollar and pushed higher through the course of the day, driven by the improvement in risk appetite, as European stocks rose for the first time in three days. Greek officials continue to discuss the details of a rescue plan with creditors and prepare to announce fresh austerity measures to warrant a second bailout to ward off the threat of a hard default.

The Euro continued to advance despite a sharp decline in German industrial production, as the focus remained on risk sentiment and Greek debt negotiations, as reports emerged that the coalition government had agreed on a framework for reforms. However, there is still no formal agreement announcement and there were also reports that the ECB would be willing to exchange Greek debt holdings with the EFSF.

In the U.S, the economic data was relatively insignificant as consumer credit rose by a further $19.8 billion in the latest month, while there was also a strong reading on consumer confidence. The data was largely overshadowed by comments from the Fed chairman Ben Bernanke who said that the non-farm payrolls data was understating the unemployment problem.

Foreign Currency Market Update – GBP / CAD Update

The GBP CAD exchange rate showed signs of a revival over the past seven days, as it continued to edge higher off its mid-January low of 1.5545. The high point of the week came on Friday lunchtime, when the pair traded as high as 1.5869, its highest level since January 9th. However, rates in the 1.58s did not hold for long and GBP CAD had dropped back into the 1.56s once again before Friday’s close.

Last Week

Last week’s session saw the release of a raft of disappointing Canadian data. Tuesday afternoon’s GDP figures revealed that Canada’ economy had shown a monthly contraction of 0.1% in November. Analysts had been expecting the number to show month-on-month growth of 0.2%, following October’s 0.0% reading. The soft tone of Canadian data was continued at midday Friday, when the latest Canadian labour market numbers showed that there had been a surprise increase in the country’s level of unemployment from 7.5% in December, to 7.6% last month. Meanwhile, there was a mixed bag of UK data releases over the past seven days. On a positive note, UK PMI Manufacturing and Services sector surveys convincingly beat analysts’ expectations. On the debit side, the latest PMI Construction sector survey disappointed and there was weaker than anticipated UK mortgage approval and house price data, pointing to a softening in Britain’s key housing sector.

Heads Up

*Denotes the importance of the data item *** being the highest level.

** Wednesday afternoon sees the release of Canadian Housing Starts data for January. A slight drop off from December’s 199,900 is expected.

** Thursday morning sees the release of the latest UK Industrial and Manufacturing Production figures. Industrial Production figures are expected to show an annualised contraction of 3.1%, while analysts expect the Manufacturing Production data to show a return to growth for the sector, following November’s negative figure.

** Thursday morning also sees the release of December’s UK Visible Trade Balance numbers. A deficit of some £8.6bn is expected.

*** The key UK data release this week comes at lunchtime Thursday, when the Bank of England Monetary Policy Committee announces its interest rate/asset purchase scheme decision. An upping of the current £275bn allocated by the Bank to its QE programme would be likely to damage the Pound.

** The closely-watched NIESR GDP Estimate for the UK is released on Thursday afternoon. If the monthly figure for January beats December’s counterpart number of 0.1%, then Sterling will be supported.

Outlook

If it wasn’t for last Friday afternoon’s key US Non-Farm Payroll data, which showed that the world’s leading economy had generated a mammoth 243,000 new jobs in January, then the GBP CAD rate could had made a convincing run at the significant 1.6000 level before close of business on Friday. Canadian data releases during the week suggested that the country’s export-driven economy is showing signs of a slowdown, as global austerity measures start to bite, dampening demand for the raw materials which Canada trades in abundance. The positive US jobs data served to reassure investors that the economic situation may be improving in the States, which remains Canada’s key export market. For the time being, at least, GBP CAD appears to have rejected its near-term low of 1.5545. A continued failure by eurozone policy makers to deal with the region’s debt dilemma could cause global investor sentiment to dip, pushing the pair back towards the 1.6000 level. Conversely, in the absence of any key Canadian data releases this week, an improvement for global stock markets could see the risk-sensitive Canadian Dollar strengthen, sending GBP CAD back towards the mid-1.50s.

Sterling / Euro and US Dollar exchange rates

The Pound continued its advance against the Euro exchange rate yesterday but the UK currency declined for a second day versus the U.S Dollar, as market speculation escalates over the prospect of further quantitative easing from the Bank of England this week. The UK currency continues to benefit from its position outside the Euro-zone and has been seen as somewhat of a haven from the debt crisis.

However, the preliminary fourth quarter growth figures showed the UK economy contracted in the final three months of the year, raising the prospect of additional quantitative easing from the BoE. It is not a foregone conclusion though and recent data over the past week showed surprisingly strong growth in manufacturing and services sectors, which may convince the majority of the MPC to adopt a wait and see approach before committing to more bond purchases.

The Euro exchange rate also declined heavily against the U.S Dollar, amid concern that Greece’s political leaders will fail to reach an agreement on a debt restructuring deal, which would allow them to receive a second bailout and stave off the threat of a hard default. The Euro declined against 13 out of the 16 most actively traded currencies and further losses may be likely until a resolution is found.

The Australian Dollar slumped from a six month high against the U.S Dollar and the strongest level since 1985 versus the Pound, after a government report showed that retail spending unexpectedly declined in January, raising the chances of an RBA cut on Tuesday. The Aussie Dollar has been largely resilient to speculation of a rate cut and this would be the third in as many months.

However, the RBA elected to leave interest rates on hold in today’s announcement and the Aussie Dollar subsequently surged higher against the majors, challenging resistance levels in the region 1.4650 versus the Pound. RBA governor Glenn Stevens said that sentiment in financial markets had “generally improved” since December.

The New Zealand Dollar was relatively unchanged and there was limited demand for higher-yielding assets, as the Greek Prime Minister Lucas Papademos began a second round of negotiations with international creditors. The Pound found support on dips below 1.5750 against the Dollar but struggled to rally back towards 1.58 in subdued trading conditions.

The latest UK economic data was mixed with the Halifax house price index recording a 0.6% increase for January. A separate report from the British Retail Consortium reported that retail sales declined 0.3% in the year to January, following a 2.2% increase the previous month. The debate surrounding the BoE interest rate announcement this week will continue today and market expectations of further quantitative easing have been scaled back following the recent PMI data.

Euro / US Dollar exchange rates

The Euro struggled to stem the losses against the majors yesterday and fell to a low in the region of 1.3020 by midday on Monday. Greek discussions continued to dominate proceedings, as the government attempted to reach an agreement on fresh austerity measures. Officials have already admitted that the second financing package will now probably need to be at least €145 billion.

The IMF led troika has made it abundantly clear that Greece will need to make fresh austerity measures to reach an agreement and if they fail then there will be a high risk of default. The Euro regained some ground overnight, as the market became slightly more optimistic that an agreement will be reached.

There were no major U.S economic reports released during the day, although a speech from regional president Bullard did attract attention as he repeated his concerns over zero interest rate policy and opposed talk of further quantitative easing. The Euro rallied back above 1.31 last night and tensions will remain high given the possibility of a relief rally if there is a Greek deal.

Today’s Exchange Rate Data

GER 11:00 – Industrial Production (December)

U.S 20:00 – Consumer Credit (December)

Foreign Currency Market Update – GBP / NZD Update

The New Zealand Dollar once again performed strongly in the currency markets last week, sending the GBP NZD exchange rate to a new 6-month low of 1.8851 during Friday’s session. The pair has been on the slide since the middle part of December, with the chart showing the highs getting lower whilst the new near-term lows are getting lower as well. As yet, GBP NZD has avoided making a convincing run at last August’s multi-decade low of 1.8546, but whilst the pair continues to trade below 1.9000, this key interim floor remains within view.

Last Week

Last week’s session was notable for the absence of tier one New Zealand data. There were more releases of interest in the UK, with mid-week Mortgage Approval data and the latest Nationwide House Price survey, both of which disappointed. Friday’s UK PMI Services sector survey provided some grounds for optimism, printing at 56.0 – far better than analysts’ expectations of 53.3. This showed that Britain’s key services sector is expanding at its quickest rate since last Spring. Perhaps the most beneficial data for the Kiwi Dollar came on Friday, with the release of this month’s Non-Farm Payroll figure in the US. The figure showed that 243,000 new jobs were created in the world’s largest economy last month, causing a surge in global appetite for risk, which helped the high-yielding currencies, including the NZD.

Heads Up

*Denotes the importance of the data item *** being the highest level.

** Thursday morning sees the release of the latest UK Industrial and Manufacturing Production figures. Industrial Production figures are expected to show an annualised contraction of 3.1%, while analysts expect the Manufacturing Production data to show a return to growth for the sector, following November’s negative figure.

** Thursday morning also sees the release of December’s UK Visible Trade Balance numbers. A deficit of some £8.6bn is expected.

*** The key UK risk event this week comes at lunchtime Thursday, when the Bank of England Monetary Policy Committee announces its interest rate/asset purchase scheme decision. An upping of the current £275bn allocated by the Bank to its QE programme would be likely to damage the Pound.

** The closely-watched NIESR GDP Estimate for the UK is released on Thursday afternoon. If the monthly figure for January beats December’s counterpart number of 0.1%, then Sterling will be supported.

** Wednesday evening sees the release of New Zealand Q4 Employment data is expected to show a firming-up of the Kiwi labour market.

** Thursday night’s NZ Card Spending data for January is expected to show an improvement from December’s figure, which showed a contraction of 0.2%.

Outlook

The GBP NZD’s major downtrend continues. This move was instigated in October 2008, when appetite for risk drained from global markets, in the wake of the credit crisis. The pair traded as high as 2.9875 at this time and has been on the slide since. Last August’s low of 1.8546 represents the bottom of the last test lower. If risk sentiment remains buoyant during this week’s session, then a renewed run at this significant support looks highly possible. A break below this level would send out a highly negative signal for GBP NZD. Clients needing to buy Kiwi Dollars in the short-term will be hoping for the continued absence of a debt agreement between Greece and its creditors. Such a scenario could see the pair settle back above the 1.9000 level, for the time-being at least.

Foreign Currency Market Update – GBP / AUD Update

Sterling continued to flounder against the go-ahead Australian Dollar during last week’s session. This saw the GBP AUD exchange rate break down to 1.4649, yet another new multi-decade low, during trading last Friday. The pair has been stuck in a pronounced downtrend since the middle of December, when it last traded at above 1.5600. With the new highs getting lower and the new lows getting lower as well, from a technical perspective, there is little reason for optimism for clients needing to buy Australian Dollars.

Last Week

Thursday’s Australian Trade Balance figure for December significantly bettered analysts expectations of a surplus of AU$1.2bn, printing at just over AU$1.7bn. This suggests that Australia’s key export industries are holding up well in spite of the relatively strong Australian Dollar. The Aussie Dollar was further assisted by Wednesday’s strong PMI Manufacturing sector survey from its key trading partner China. Meanwhile, there has been little in the way of tier one data releases in the UK over the past seven days – Friday’s better than anticipated UK PMI Services figure was perhaps the most significant. The survey showed at 56.0, confirming that Britain’s key service industries are expanding at their fastest rate since last March. UK Mortgage Approval and Nationwide House Price data, released mid-week, disappointed, hinting at a weakening in Britain’s housing market.

Heads Up

*Denotes the importance of the data item *** being the highest level.

** Thursday morning sees the release of the latest UK Industrial and Manufacturing Production figures. Industrial Production figures are expected to show an annualised contraction of 3.1%, while analysts expect the Manufacturing Production data to show a return to growth for the sector, following November’s negative figure.

** Thursday morning also sees the release of December’s UK Visible Trade Balance numbers. A deficit of some £8.6bn is expected.

*** The key UK data release this week comes at lunchtime Thursday, when the Bank of England Monetary Policy Committee announces its interest rate/asset purchase scheme decision. An upping of the current £275bn allocated by the Bank to its QE programme would be likely to damage the Pound.

** The closely-watched NIESR GDP Estimate for the UK is released on Thursday afternoon. If the monthly figure for January beats December’s counterpart number of 0.1%, then Sterling will be supported.

*** The key risk event in Australia comes in the early hours of Tuesday morning, when the Reserve Bank of Australia announces its interest rate decision. A cut in interest rates from their current 4.25% level to 4.00% is widely anticipated. If the RBA elects to ‘hold’, the Aussie could benefit.

*** Friday’s release of the Reserve Bank’s Board Statement will be closely-monitored for clues on future Australian monetary policy.

Outlook

It will take something major to arrest the current strong downtrend in the GBP AUD exchange rate. Last Friday’s US employment data, which came out much better than expected, has increased investors’ appetite for assets which are perceived to be ‘riskier’ bets – this has further benefitted the Australian Dollar. Even a trimming of domestic interest rates by Australia’s central bank tonight might not be enough to cause a shift out of the Aussie, as a cut has already been widely factored-in by market participants. Clients requiring Australian Dollars will be hoping for bad news from Greece’s ongoing debt talks to weaken the Aussie. In the absence of such news, further downward movement is possible for GBP AUD, with a close below last Friday’s 1.4649 level sending out a strong negative signal for the pair.

Sterling / Euro and US Dollar exchange rates

Following on from last week, The Pound received a timely boost as a gauge of UK manufacturing unexpectedly showed that growth returned to the sector in January and rose to the highest level in eight months. The UK currency rose through 1.58 to a 5-month high against the Dollar and consolidated on Wednesday’s gains versus the Euro, as factory output increased following a quarter of contraction.

The gauge rose to 52.1 from a revised 49.7 in December with a level about 50 indicating growth in the sector. Separate reports showed that manufacturing in Europe, China and India also rose in January, which increased investors’ demand for riskier assets and weakened the Dollar’s position as a safe haven.

The UK manufacturing figures were a real surprise considering that Europe, the biggest UK export market, has been engulfed in sovereign debt crisis, which was thought to have clouded the outlook for factory production this year. It is difficult to say whether this trend is sustainable but the boost in output will be a welcome relief to Bank of England officials, who will be considering whether to implement further quantitative easing measures next month.

The Pound maintained a firm tone against the Dollar and pushed to highs above 1.20 versus the Euro. The UK currency is still being influenced strongly by swings in risk sentiment and a firm global tone helped boost the UK stock market as well as Sterling. The FTSE 100 Index rose by the most in a month, as manufacturing gauges in China and the U.S rose and increased optimism that growth in the world’s largest economies will boost earnings potential and spur demand.

The Pound advanced against the Euro and remained close to a 10-week high versus the U.S Dollar, despite a report, which showed that UK construction output slowed to the weakest reading in four months for January. UK government bonds advanced, pushing 10-year yields down, as investors bought safe haven assets following the disappointing result.

The Aussie Dollar traded at a five month high versus the U.S Dollar, after a report showed that the nation’s trade surplus increased beyond initial estimates. The report added to speculation that the Reserve Bank will refrain from cutting interest rates in next week’s announcement. The Euro weakened against the Pound and the Dollar, as Greece continues to struggle to reach an agreement with its bondholders on cutting the nation’s debt level, adding to concern that Europe’s crisis will deepen.

The single currency fell against 14 out of the 16 most actively traded currencies, as the market waits impatiently for some form of resolution to the debt crisis. The Pound was unable to hold above 1.5850 against the Dollar and drifted lower through the course of the day. Declines were curbed by a generally firm tone against the Euro, as the UK currency remained stubbornly above 1.20.

On Friday, the UK services PMI data was much stronger-than-expected with a rise in the January reading to 56, from 54 the previous month, the strongest result since March 2011. There was a shift in expectations surrounding the Bank of England interest rate announcement this week following the data with regards quantitative easing, which will help support the Pound.

Euro / US Dollar exchange rates

The Euro recorded a weekly decline against the Dollar and the Yen, as Greece and its creditors struggled to reach an agreement on a debt swap deal. The Dollar also struggled against the majors last week, as the non-farm payrolls data was much stronger-than-expected with a 243,000 increase in the number of jobs for January, from a revised 203,000 increase the previous month.

The Euro received a temporary boost following media reports that China was considering investing in the EFSF and the ESM. The single currency retreated sharply through the course of the week, following comments from the German Chancellor Angela Merkel and the ongoing failure of EU officials to agree on a debt restructuring deal for Greece.

Following numerous reports over the past week that a deal was extremely close to being announced, the comments from Merkel dampened optimism and weakened the Euro. More seriously, there were concerns that any deal would still not provide a durable solution given the underlying debt burden. In this context, there will be fears that Greece could still exit the Euro.

Today’s Exchange Rate Data

EU 09:30 – Sentix Index (February)

GER 11:00 – Industrial Orders (December)

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

The Pound advanced against the Euro exchange rate and remained close to a 10-week high versus the U.S Dollar, despite a report yesterday, which showed that UK construction output slowed to the weakest reading in four months for January. UK government bonds advanced, pushing 10-year yields down, as investors bought safe haven assets following the disappointing result.

The report follows a fairly robust manufacturing PMI on Wednesday and promotes mixed feelings over the sector and the outlook for the UK economy. Nevertheless, risk appetite remains strong and the Australian and New Zealand Dollars maintained two-days of gains with the former rising to a high close to the strongest level since 1985 versus the Pound.

The Aussie has also traded at a five month high versus the U.S Dollar, after a report showed that the nation’s trade surplus increased beyond initial estimates. The report added to speculation that the Reserve Bank will refrain from cutting interest rates in next week’s announcement. The Euro weakened against the Pound and the Dollar, as Greece continues to struggle to reach an agreement with its bondholders on cutting the nation’s debt level, adding to concern that Europe’s crisis will deepen.

The single currency fell against 14 out of the 16 most actively traded currencies, as the market waits impatiently for some form of resolution to the debt crisis. The Pound was unable to hold above 1.5850 against the Dollar and drifted lower through the course of the day. Declines were curbed by a generally firm tone against the Euro, as the UK currency remained stubbornly above 1.20.

The UK services PMI will be watched closely today and a weaker tone here would have potentially more damaging implications for the Pound. Bank of England policy maker Adam Posen was slightly more optimistic surrounding the economic outlook, but he still proposed additional quantitative easing of around £75 billion. The impact on the Pound of further monetary easing on this scale should be measured, although uncertainty will be a key feature ahead of next Thursday’s policy meeting.

Euro / US Dollar exchange rates

The Euro exchange rate is heading towards a weekly decline against the Dollar and the Yen, as Greece and its creditors struggle to reach an agreement on a debt swap. The Dollar has also struggled against the majors this week, ahead of the non-farm payrolls data, which will probably show that employers increased payrolls in January.

The Euro exchange rate received a temporary boost yesterday following media reports that China was considering investing in the EFSF and the ESM. The single currency retreated sharply through the course of the day, following comments from the German Chancellor Angela Merkel and the ongoing failure of EU officials to agree on a debt restructuring deal for Greece.

Following numerous reports over the past week that a deal was extremely close to being announced, the comments yesterday dampened optimism and weakened the Euro. More seriously, there were concerns that any deal would still not provide a durable solution given the underlying debt burden. In this context, there will be fears that Greece could still exit the Euro.

Today’s Exchange Rate Data

EU 08:58 – Markit Services PMI (January) – Composite

U.K 09:28 – CIPS Services PMI (January)

EU 10:00 – Retail Sales (December)

U.S 13:30 – Non-Farm Payrolls (January) – Unemployment / Average Earnings

U.S 15:00 – Factory Orders (December)

U.S 15:00 – ISM Non-Manufacturing PMI (January) – Business Activity

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

The Pound received a timely boost yesterday as a gauge of UK manufacturing unexpectedly showed that growth returned to the sector in January and rose to the highest level in eight months. The UK currency rose through 1.58 to a 5-month high against the Dollar and consolidated on yesterday’s gains versus the Euro, as factory output increased following a quarter of contraction.

The gauge rose to 52.1 from a revised 49.7 in December with a level about 50 indicating growth in the sector. Separate reports showed that manufacturing in Europe, China and India also rose in January, which increased investors’ demand for riskier assets and weakened the Dollar’s position as a safe haven.

The UK manufacturing figures were a real surprise considering that Europe, the biggest UK export market, has been engulfed in sovereign debt crisis, which was thought to have clouded the outlook for factory production this year. It is difficult to say whether this trend is sustainable but the boost in output will be a welcome relief to Bank of England officials, who will be considering whether to implement further quantitative easing measures next month.

The Pound maintained a firm tone against the Dollar and pushed to highs above 1.20 versus the Euro. The UK currency is still being influenced strongly by swings in risk sentiment a firm global tone helped boost the UK stock market as well as Sterling. The FTSE 100 Index rose by the most in a month, as manufacturing gauges in China and the U.S rose and increased optimism that growth in the world’s largest economies will boost earnings potential and spur demand.

The benchmark FTSE 100 Index rose 1.9% by the close of trading last night and the gauge rallied 2% in January to record its second consecutive month of gains. The positive sentiment has fed into risk appetite and enhanced demand for the higher-yielding assets. The Australian Dollar has rallied to the highest level against the Pound since 1985 in the first quarter, as global growth increases its appeal.

Elsewhere in the UK yesterday, the Nationwide house price index recorded a 0.2% decline for the second successive month, maintaining the recent soft tone of the housing sector. The Pound will also be vulnerable to speculation that the Bank of England would move towards additional quantitative easing within the next month.

Euro / US Dollar exchange rates

The Euro continued to gain ground against the U.S Dollar yesterday and worked up towards near-term resistance at 1.32, although the move was largely driven by U.S weakness rather than Euro strength. The Euro-zone PMI manufacturing index edged higher but any optimism was tempered by the fact that indices in Greece, Spain and Italy all remained significantly under the level to indicate growth.

The latest Euro-zone consumer price inflation report was unchanged at 2.7% for January and markets still expected the ECB to cut interest rates further during the first quarter. There was further speculation over an imminent Greek private sector debt restructuring deal, although again there was no actual announcement of a deal, which undermined Euro support versus the Pound.

In the U.S, the latest ADP employment report was marginally weaker-than-expected with a 170,000 increase for January, but there was still a strong two-month increase following a revised 292,000 gain the previous month. Elsewhere, the ISM index rose to 54.1 from a revised 53.1 the previous month, indicating strong growth in the sector, which further boosted risk appetite and weakened demand for the Dollar as a safe haven.

Today’s Exchange Rate Data

U.K 09:30 – Construction PMI (January)

EU 10:00 – Producer Price Index (January)

U.S 13:30 – Initial Jobless Claims (w/e 28th January)

U.S 13:30 – Productivity / Labour Costs (Q4)

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

The Pound rose to the highest level against the U.S Dollar in almost three months, peaking at a high just under 1.58 yesterday, while the UK currency also continued to edge higher versus the Euro exchange rate. European leaders are moving closer towards resolving the sovereign debt crisis and this is dampening demand for the Dollar as a safe haven.

The Greek Prime Minister Lucas Papademos said that progress had been made in debt swap talks with the country’s bondholders, adding to optimism that a resolution isn’t far away. The Pound received a boost over-night, after a report showed that UK consumer confidence increased to the highest level in seven months in January.

The Gfk gauge of consumer sentiment climbed four points from December to minus 29, the highest reading since June and consumers’ outlook for the economy and their personal finances also improved. A separate report showed that UK mortgage approvals rose less than initial expectations in December and consumer credit fell by the most on record, indicating tighter credit conditions and a lack of activity in the housing sector.

Although the data is having a modest impact on the market, swings in risk sentiment is what’s really driving the rates at present and the Pound took advantage of the increase in global stocks to make strong gains versus the Dollar. European leaders agreed to accelerate the introduction of a permanent €500 billion rescue fund and signed a deficit control treaty.

There will also be additional pressure for the Bank of England to engage in quantitative easing with an announcement of an extension to the bond purchasing plan possibly in February. The current round of purchases ends next month and with the economy contracting and inflation slowing, policy makers may have all the impetus they need to implement further easing.

The focus this morning will fall on the latest manufacturing PMI for January and the report is expected to show modest growth in the sector at the start of the calendar year, following a contraction in December. A worse-than-expected result would certainly put the Pound on the back foot, as speculation over a technical recession would increase.

Euro / US Dollar exchange rates

The Euro exchange rate remained relatively unchanged against the Dollar in early trading yesterday and challenged resistance levels above the 1.32 level before losing momentum. German unemployment data was better-than-expected with a decline of over 30,000 for December. However, French and German consumer spending declined, while the jobless rate in Italy also increased.

Following Papademos’s comments yesterday, there was no Greek deal with private creditors and there was further pressure on the ECB to accept losses on its Greek bond holdings, which unsettled confidence and weakened the Euro. EU leaders are now looking for a deal on Greece by the beginning of next week with continuing delays undermining sentiment.

Portuguese bond yields also rose to fresh record highs, as the threat of a default continued to rise. The U.S data was generally worse-than-expected with a decline in consumer confidence for January. The Chicago PMI index also weakened on the month and the data only served to weaken risk appetite and supported the Dollar.

Today’s Exchange Rate Data

EU 08:58 – Markit Manufacturing PMI (January)

U.K 09:28 – CIPS Manufacturing PMI (January)

EU 10:00 – HICP Flash (January)

U.S 13:15 – ADP Employment (January)

U.S 15:00 – Construction Spending (December)

U.S 15:00 – ISM Manufacturing (January)

Foreign Currency Market Update – GBP / USD Update

All eyes were on the eurozone summit yesterday, which resulted in 25 of the 27 EU member states agreeing a new pact focused on tighter fiscal discipline. The idea is that everyone returns to sign the pact at the next summit in March. Both the UK and Czech Republic kept out of the deal, but tacitly endorsed the other members to make a deal outside of the EU to address the euro’s problems. There has been no discernable reaction from the Sterling/Dollar exchange rate that can be directly attributed to the summit. It is worth noting that Italian bond yields are well below 6%, whereas a few weeks ago they were well above 7%. That’s a reliable barometer of investors’ attitudes to the Euro debt crisis. At present the crisis is coming off the boil, which tends to go hand in hand with Dollar weakness as money flows toward higher yielding (riskier) assets.

Last Week

The UK’s public sector borrowing figures came in better than expected for December (£10.8bn Vs £13.4bn expected). This was overshadowed by the GDP figures for the fourth quarter which showed a 0.2% dip, double the expected contraction. On top of that the minutes of the last Bank of England meeting indicated that some members were actively seeking an extension to the asset purchasing program that we have come to know as ‘QE’. With these two data items Sterling has done well to maintain its composure.

The dollar has been on the back foot as fourth quarter GDP came in at 0.4% or 2.8% (annualised) versus 3.0% expected, still way better than the UK’s. Inflation data has also been softer than expected, with most economists predicting a 1.6% inflation rate in 2012, well below the 4%+ we are seeing in the UK. In the Federal Reserve’s monthly press conference last week chairman Ben Bernanke talked about the possibility of low interest rates for some time to come given the low inflation data and anaemic job creation figures. Again that is negative for the Dollar.

Heads Up

*Denotes the importance of the data item *** being the highest level.

** Wednesday, Thursday and Friday bring the release of the latest Purchasing Managers’ Index surveys for the UK’s Manufacturing, Construction and Services sectors respectively. The Services edition will be the most closely-watched.

** Thursday we have the latest unemployment data from the US.

*** Friday look out for nonfarm payrolls which is generally considered a more important figure than Thursday’s jobless claims data.

Outlook

Sterling is on the front foot for now, and a close above 1.5700 is a positive signal as the Pound was previously rebuffed from this level 3 times in November. In the absence of any new spike in risk aversion the dollar could remain on the defensive.

Foreign Currency Market Update – GBP / EUR Update

All eyes were on the eurozone summit yesterday, which resulted in 25 of the 27 EU member states agreeing a new pact focused on tighter fiscal discipline. The idea is that everyone returns to sign the pact at the next summit in March. Both the UK and Czech Republic kept out of the deal, but tacitly endorsed the other members to make a deal outside of the EU to address the euro’s problems. There has been no discernable reaction from the Sterling/Euro rate.

Last Week

The UK’s public sector borrowing figures came in better than expected for December (£10.8bn Vs £13.4bn expected). This was overshadowed by the GDP figures for the fourth quarter which showed a 0.2% dip, double the expected contraction. On top of that the minutes of the last Bank of England meeting indicated that some members were actively seeking an extension to the asset purchasing program that we have come to know as ‘QE’. With these two data items Sterling has done well to maintain its composure.

Heads Up

* Denotes the importance of the data item *** being the highest level.

** German and Eurozone unemployment data today met market expectations at 6.7 % and 10.4% respectively.

** Wednesday, Thursday and Friday bring the release of the latest Purchasing Managers’ Index surveys for the UK’s Manufacturing, Construction and Services sectors respectively. The Services edition will be the most closely-watched.

** Eurozone consumer price index data is out on Wednesday and is expected to read 2.7%.

** Eurozone retail sales for December are expected to by 0.3% ahead on last month in figures due for release on Friday.

Outlook

In last week’s update we asked whether the Pound can finally make a convincing break above 1.22, having tried and failed over the last few years. The answer so far has been in the negative despite the Euro carrying the weight of the economic world on its shoulders, but we’re not ready to throw in the towel yet. Sterling is still managing to tread water at relatively good levels around 1.19, whereas previous failures from 1.20+ territory have been spiky affairs that result in a rapid decline.

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

The Pound declined against the U.S Dollar yesterday, led by a decline in risk appetite, while the UK currency edged higher versus the Euro ahead of the EU summit in Brussels yesterday, where officials are putting the finishing touches to a German-led deficit control treaty. The result of the treaty should be the endorsement of the €500 billion rescue fund to be set up this year.

The Euro is weakening in anticipation of the announcement but the single currency may receive a boost once officials announce the full details of the treaty. Elsewhere, a report in the UK yesterday showed that house prices were unchanged in January and from a year earlier had fallen 1.6%. The report added to the recent pessimism over the housing market and will be the start of a number of economic reports this week that give us an indication of whether the UK economy will officially slip into a recession over the next quarter.

The Euro was also down against the U.S Dollar as of midday in London, amid concern that tentative negotiations over a Greek restructuring deal will hamper efforts to resolve the debt crisis. The Euro also weakened as Italy raised less than its maximum target at a bond sale following Fitch Ratings downgrade of the nation’s credit rating last week.

This helped to add to the overall decrease in risk appetite, which was evident in the performance of some of the higher-yielding currencies. The South African Rand and the Australian Dollar declined as stocks fell and the increased volatility in the market may see these high-yield currencies weaken even further.

The Pound gained support on dips below 1.5640 against the Dollar and pushed back to challenge resistance levels in the region of 1.5720 as the U.S currency weakened again. Data last night showed that UK consumer confidence improved in January, which will provide some support to sentiment. Although confidence will remain very fragile, amid fears over the consumer spending outlook.

The PMI data releases this week will be extremely important in determining confidence in the domestic outlook with the manufacturing survey due on Wednesday. Safe haven considerations will also remain an important focus and there will be further speculation over defensive inflows into the UK as a refuge from persistent uncertainty surrounding the Euro-zone.

Euro / US Dollar exchange rates

The Euro remained largely on the back foot against the U.S Dollar yesterday, dipping to lows in the region of 1.3070, amid reports that still no agreement had been reached between the Greek government and private sector bondholders, despite the Greek Prime Minister Lucas Papademos saying that progress had been made.

German Chancellor Angela Merkel’s stance was that Germany would not back any increase in the rescue package for Greece even if estimates of the amount required was increased. Any such deal for creditors would be regarded as an effective default by the ratings agencies. There were further concerns surrounding Portugal’s debt during the day, as yields rose to fresh record highs, as fears over a default intensified.

There was also speculation that European banks would look to increase emergency funding over the coming months. The U.S economic data did not have a major impact and the Euro recovered from losses from late in the U.S session on a general improvement in risk appetite and fresh hopes surrounding a Greek resolution.

Today’s Exchange Rate Data

U.K 00:01 – Gfk Consumer Confidence (January)

GER 08:00 – Retail Sales (December)

U.K 09:30 – Mortgage Approvals (December)

EU 10:00 – Unemployment (December)

U.S 13:30 – Employment Costs (Q4)

U.S 14:00 – Case Shiller House Prices (November)

U.S 14:45 – Chicago PMI (January)

U.S 15:00 – Consumer Confidence (January)

Foreign Currency Market Update – GBP / CAD Update

The GBP CAD rate has recovered from the 4-month low of 1.5545 which it reached on 17th January to rapidly trade back above 1.5800. However, the past week has seen Sterling’s recovery against the Canadian Dollar falter. The Pound has spent virtually the whole of the past seven days trading in a tight range between 1.5700 and 1.5800 against the CAD. It is possible that this is a period of consolidation for the GBP CAD rate before it heads back towards 1.6000 once more. Alternatively, this period in the doldrums could signal that Sterling’s mini-revival has run out of steam.

Last Week

Last Tuesday’s Canadian Retail Sales numbers for November came out at slightly better than analysts had expected, showing a monthly improvement of 0.3%. However, the data was still considerably worse than October’s counterpart figure of 0.9%, hinting at a dropping off in demand from Canadian consumers. Meanwhile, last week’s UK data releases were far from supportive for the Pound. Wednesday proved to be a black day for investors holding Sterling, with two key releases apparently confirming that there are troubled times ahead for UK PLC. The minutes of the most recent Bank of England Monetary Policy Committee meeting suggested that an extension to the Bank’s asset purchase scheme is not far off, while UK GDP growth numbers showed that the British economy shrank by 0.2% in the last quarter of 2011, suggesting that a double-dip recession is not far off.

Heads Up

*Denotes the importance of the data item *** being the highest level.

** The latest GfK Consumer Confidence survey is released in the early hours of Tuesday morning. An improvement from December’s figure of -33 is expected.

** Tuesday morning sees the release of UK Mortgage Approval data for December.

** Wednesday, Thursday and Friday bring the release of the latest Purchasing Managers’ Index surveys for the UK’s Manufacturing, Construction and Services sectors respectively. The Services edition will be the most closely-watched.

*** Tuesday afternoon sees the release of Canadian GDP Growth figures for November – a monthly expansion of 0.2% is expected, with anything less likely to cause downside pressure for the CAD.

*** Canadian unemployment data for January is penned for release at Midday UK time on Friday. The rate of Canadian unemployment is expected to remain at 7.5%.

Outlook

The Canadian Dollar is looking resilient. Even last Friday’s weaker than anticipated growth data for Canada’s major trading partner, the US, failed to cause the CAD to weaken. Canada’s currency remains firmly tethered to global appetite for risk thanks to Canada’s status as a major exporter of raw materials. Stock markets have started this week’s session tamely; if this continues, then the CAD could experience some downside pressure. The continuing absence of a debt deal between Greece and its creditors could also lead to investor sentiment to haemorrhage, causing further selling pressure on the Canadian Dollar. However, if Tuesday’s Canadian growth and Friday’s unemployment figures better expectations, then the CAD would firm up, causing the interim psychological floor of 1.5545 to hove into view for the GBP CAD rate.

Foreign Currency Market Update – GBP / NZD Update

Last week’s session ended with the New Zealand Dollar bullying the Pound, sending GBP NZD to a new four month low of 1.9026. The pair has since moved away from this level, to briefly break 1.9200 during today’s session, suggesting that 1.9000 is acting as an interim psychological floor. The GBP NZD rate has spent the last two weeks range-trading between resistance at 1.9400 and Friday’s low of 1.9026. Prior to this, the pair was in a strong downtrend for a month, taking it from 2.0712 as recently as 15th December, all the way down to 1.9210 on January 11th. The tight trading range of the past two weeks could prove to be a ‘pause for breath’ before the pair heads lower.

Last Week

The Reserve Bank of New Zealand opted to maintain its key lending rate at 2.50% last Wednesday, as per analysts’ expectations. This means that New Zealand’s interest rates remain some 2.00% higher than the current Bank of England base rate, confirming NZ as a relatively attractive destination for inward investment. Other data releases last week provided some encouraging signs for the Kiwi Dollar, with Thursday’s New Zealand Trade Balance figure for December significantly bettering expectations to print at NZ$338m and Wednesday’s Business NZ Performance of Manufacturing Index suggesting that domestic manufacturing output is once again on the up. On the other side of the coin, last week’s UK data releases disappointed – the minutes of January’s Bank of England Monetary Policy Committee meeting showed that several members are advocating further quantitative easing in order to grease the wheels of the ailing British economy. UK GDP growth data, released at the same time as the minutes, showed that British economic activity contracted by 0.2% in the three months to the end of December 2011, suggesting that the UK economy could once more be tumbling towards recession.

Heads Up

*Denotes the importance of the data item *** being the highest level.
** The latest GfK Consumer Confidence survey is released in the early hours of Tuesday morning. An improvement from December’s figure of -33 is expected.

** Tuesday morning sees the release of UK Mortgage Approval data for December.

** Wednesday, Thursday and Friday bring the release of the latest Purchasing Managers’ Index surveys for the UK’s Manufacturing, Construction and Services sectors respectively. The Services edition will be the most closely-watched.

* Various tier 3 releases are penned in for this week in New Zealand; tonight’s NZ Building Permits numbers and Thursday night’s Net Migration figures providing the highlights. Neither will be market-moving.

Outlook

This week’s session has begun with institutional investors shunning risk and moving into assets with a higher safety tariff. This has seen global stock markets registering losses and has caused the New Zealand Dollar to lose ground against the majority of the other sixteen most-actively traded currencies. Market jitters have been triggered by the continued failure of Greek creditors to agree a debt deal with the country’s government. If this policy void continues, then full on risk aversion could take hold, leading to a move back above the key 2.00 level for GBP NZD. Alternatively, a rapid resolution to Greece’s debt woes could spark the return of a ‘risk-on’ trading environment, sending stock markets higher and strengthening the NZD. Such a scenario would send GBP NZD downwards, bringing last August’s multi-year low of 1.8546 into view.

Foreign Currency Market Update – GBP / ZAR Update

The Pound made two separate incursions above the significant 13.0000 level against the Rand in the last two months of 2011. On both occasions, the visit lasted a few brief days and on both occasions the level was strongly rejected in the weeks which followed. The GBP ZAR rate last traded above 13.0000 in the immediate lead-up to Christmas and the hangover which has ensued has been painful for investors needing to purchase Rand-denominated assets, taking the GBP ZAR rate all the way down to a four month low of 12.1610 last Friday.

Last Week

The South African currency remains strongly tethered to global risk appetite – when stock markets trade into positive territory, the Rand will invariably be on the front foot. Last week saw global stock indices register healthy gains, providing a fair wind for the Rand. Meanwhile, things were going a lot less swimmingly for the Pound, as UK data releases provided cause for concern for investors holding Sterling. Wednesday was a key day for the Pound – the release of the minutes of the Bank of England Monetary Policy Committee meeting from earlier this month suggested that policy members seeking a further loosening of policy, in the form of an increase in the Bank’s QE programme, may be close to winning the argument. UK GDP growth figures, released at the same time, showed that the British economy shrank by 0.2% in the last quarter of 2011. A repeat performance for Q1 2012’s counterpart figure, later this year, would mean that Britain had double-dipped its way into a new recession.

Heads Up

*Denotes the importance of the data item *** being the highest level.
** The latest GfK Consumer Confidence survey is released in the early hours of Tuesday morning. An improvement from December’s figure of -33 is expected.

** Tuesday morning sees the release of UK Mortgage Approval data for December.

** Wednesday, Thursday and Friday bring the release of the latest Purchasing Managers’ Index surveys for the UK’s Manufacturing, Construction and Services sectors respectively. The Services edition will be the most closely-watched.

Outlook

Today has seen the Rand give up a large portion of the gains it made against the Pound during last week’s session, pushing the GBP ZAR rate back towards 12.3500. The move against the Rand has come as institutional investors shift their funds out of assets which are perceived to carry a higher risk tariff. This flight to safety has been caused by the ongoing failure of Greece’s government to reach an accord with the Institute of International Finance – the body appointed to represent the debt-addled Hellenic state’s creditors. Last Friday’s weaker than anticipated US growth figures also dampened the mood of market participants, proving that bad news for the world’s leading economy also spells bad news for the world economy. There has been very little trading between last Friday’s 4-month low of 12.1610 and the key interim floor of 12.0000 in the last few years, suggesting that if the GBP ZAR rate breaks down through 12.1610, a break down through 12.0000 could follow in short order. Caution is advisable for clients needing to purchase ZAR in the short-to-medium term.

Foreign Currency Market Update – GBP / AUD Update

The Pound broke down to a new multi-year low of 1.4686 against the Australian Dollar last Thursday, breaching the existing support of 1.4712, which was reached on 17th January. The fact that the GBP AUD exchange rate set a new low so rapidly after the downward move which culminated on 17th January, sends out a negative signal for the pair. The GBP AUD rate has staged a mini-recovery since last Thursday, to make a renewed run at 1.4900 during today’s session, providing some reason for limited optimism, however clients needing to purchase Australian Dollars in the near term should remain cautious; a move below 1.4686 would plunge the pair into no-man’s land once again.

Last Week

Australian Quarter 4 CPI inflation data, released in the early hours of last Wednesday morning, printed at 3.1%, versus Q3’s counterpart figure of 3.5%. Analysts had expected a higher figure for Q4, suggesting that the acceleration in Australian consumer prices of recent years is cooling. This gives the Reserve Bank of Australia increased scope for further interest rate cuts as 2012 progresses, which could weigh heavily on the Aussie. Meanwhile, UK data releases have proved damaging for Sterling over the past seven days – the release of the minutes of January’s Bank of England Monetary Policy Committee meeting, last Wednesday, showed that several committee members believe that the Bank should extend the £275bn already allocated to its asset purchase scheme, while UK growth data, also released on Wednesday, showed that British economic activity had contracted by 0.2% in the final three months of 2011. This hints that the UK economy may be heading towards a much-vaunted double-dip recession.

Heads Up

*Denotes the importance of the data item *** being the highest level.
** The latest GfK Consumer Confidence survey is released in the early hours of Tuesday morning. An improvement from December’s figure of -33 is expected.

** Tuesday morning sees the release of UK Mortgage Approval data for December.

** Wednesday, Thursday and Friday bring the release of the latest Purchasing Managers’ Index surveys for the UK’s Manufacturing, Construction and Services sectors respectively. The Services edition will be the most closely-watched.

** The early hours of Thursday morning sees the release of December’s Australian Trade Balance figures. A drop-off from November’s AUD1.38bn would suggest that the historically strong AUD is starting to hurt Australian exporters.

Outlook

The situation in the eurozone continues to have a strong effect on the risk-sensitive Australian Dollar. Global investors have been spooked by Greece’s continuing inability to reach a deal with its creditors and this has seen appetite for risk ebb at the start of this week’s session, weakening the Australian Dollar. Investors will be looking to the EU summit, which started today, to provide reassurance. If Greek debt negotiations fail to yield fruit sooner rather than later, then the GBP AUD exchange rate may stop bumping along the bottom of its range and could make a recovery to trade back above the psychologically key 1.5000 level. Conversely, positive noises from Europe could cause world stock markets to improve, taking the Australian Dollar with them, sending the GBP AUD rate down through support at 1.4686.

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

Following on from last week, the Pound declined to a low of 1.1840 against the Euro, as the single currency made widespread gains following the latest PMI manufacturing and services data. Both indices rose more-than-expected in January, indicating a resilience in the Euro-zone economy, amidst the doom and gloom surrounding sovereign debt levels and multiple credit rating downgrades.

The Euro rose to a near four week high against the Yen and rose significantly through 1.30 versus the Dollar to a high just under 1.32. However, the Euro was unable to sustain its advance and came under further selling pressure through the course of the day on Thursday. The single currency declined to 1.2020 versus the Pound and slipped back under 1.30 against the Dollar in choppy trading conditions, which illustrates a fundamental lack of appetite for the single currency.

European stocks also slumped from the highest level in five months, as finance ministers failed to agree on a debt swap deal for Greece and called for a greater contribution from bondholders. U.S futures also declined alongside Asian stocks. The ongoing uncertainty surrounding a restructuring of Greek debt combined with the lingering threat of a default will weigh on the Euro and prevent a sustained advance until a resolution is found.

The Pound found support in the region of 1.5650 against the U.S Dollar and briefly pushed to a fresh two-week high at 1.5720, before selling off towards the close of trading on Friday. The UK currency slipped towards 1.1860 versus the Euro but recovered back towards 1.1950, as rumours spread of Greek debt restructuring deal.

A report from the Confederation of British Industry showed that a gauge of retail sales was significantly weaker-than-expected with a decline to a three-year low of -22. The data reinforced a real lack of confidence in the spending outlook even though officials said sales data has held generally firmer, which suggests that High Street sales may be under pressure.

The Pound will also be under pressure amid expectations that the Bank of England will engage in further quantitative easing, potentially as soon as February. There will also be uncertainty over defensive flows from the Euro-zone, especially if confidence in the Portuguese outlook continues to deteriorate.

The Pound is still reeling from Wednesday’s preliminary GDP figures for the fourth quarter. The headline figure was marginally weaker-than-expected with a 0.2% contraction and there will be concerns over the lack of growth in the private sector. The data has also reinforced near-term concerns surrounding the economy and the underlying debt levels.

The Bank of England’s MPC minutes from January’s meeting recorded a 9-0 vote for keeping rates and quantitative easing on hold. The minutes did, however, reveal a greater divergence in opinion surrounding the outlook for growth and inflation. There was still a lack of confidence in the economic outlook, but several members were doubtful whether there would be a sustained decline in inflation, making it difficult to secure widespread support for an extension to the bond purchasing plan.

Bank of England policy maker David Miles commented on Friday that it would be presumptuous to assume that there would be additional quantitative easing at the February policy meeting, indicating that a move to extend the plan is not a foregone conclusion. The latest UK PMI data will be watched closely this week with data due on all sectors of the economy. The January data was stronger-than-expected and another stronger release this month would lessen the immediate concerns surrounding a recession in the early part of this year.

Euro / US Dollar exchange rates

The U.S Dollar weakened against all of the 16 most actively traded currencies last week, as the Federal Reserve’s pledged to keep interest rates at a record low for longer than expected helped spur investor demand for higher-yielding currencies. The Dollar touched the lowest level in five weeks versus the Euro, after policy makers said the benchmark lending rate would stay low until at least late 2014.

There was still a high degree of uncertainty surrounding the Greek debt situation and there was also concerns about Portugal, as yields continued to rise to record levels with 10-year yields close to the 15% level. There were further rumours of pressure on the ECB to take losses on its holdings of Greek bonds, which helped to unsettle the Euro.

The Euro found support on dips to just below the 1.31 level against the Dollar and pushed higher again on Friday. The headline U.S GDP data was marginally weaker-than-expected with a fourth quarter increase of 2.8%, compared to expectations of a 3% rise. The breakdown of data also recorded a strong increase in inventories for the quarter, which increased concerns of a possible slowdown over the coming months.

Today’s Exchange Rate Data

EU – EU Leaders Summit

EU 10:00 – Economic Sentiment (January) – Industrial / Services / Construction

U.S 13:30 – Personal Income / Consumption (December) – Core PCE

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

The Pound found support in the region of 1.5650 against the U.S Dollar and briefly pushed to a fresh two-week high at 1.5720, before selling off towards the close of trading last night. The UK currency slipped towards 1.1860 versus the Euro but recovered back towards 1.1950, as rumours spread of Greek debt restructuring deal.

A report from the Confederation of British Industry showed that a gauge of retail sales was significantly weaker-than-expected with a decline to a three-year low of -22. The data reinforced a real lack of confidence in the spending outlook even though official sales data has held generally firmer, which suggests that High Street sales may be under pressure.

The Pound will also be under pressure amid expectations that the Bank of England will engage in further quantitative easing, potentially as soon as February. There will also be uncertainty over defensive flows from the Euro-zone, especially if confidence in the Portuguese outlook continues to deteriorate.

The Pound is still reeling from Wednesday’s preliminary GDP figures for the fourth quarter. The headline figure was marginally weaker-than-expected with a 0.2% contraction and there will be concerns over the lack of growth in the private sector. The data has also reinforced near-term concerns surrounding the economy and the underlying debt levels.

The Bank of England’s MPC minutes from January’s meeting recorded a 9-0 vote for keeping rates and quantitative easing on hold. The minutes did, however, reveal a greater divergence in opinion surrounding the outlook for growth and inflation. There was still a lack of confidence in the economic outlook, but several members were doubtful whether there would be a sustained decline in inflation, making it difficult to secure widespread support for an extension to the bond purchasing plan.

Euro / US Dollar exchange rates

The U.S Dollar weakened against all of the 16 most actively traded currencies, as the Federal Reserve’s pledge to keep interest rates at a record low for longer than expected, which helped spur investor demand for higher-yielding currencies. The Dollar touched the lowest level in five weeks versus the Euro, after policy makers said the benchmark lending rate would stay low until at least late 2014.

There was still a high degree of uncertainty surrounding the Greek debt situation and there was also concerns about Portugal, as yields continued to rise to record levels with 10-year yields close to the 15% level. There were further rumours of pressure on the ECB to take losses on its holdings of Greek bonds, which unsettled the Euro.

Today’s Exchange Rate Data

U.K 00:01 – Gfk Consumer Confidence (January)

EU 09:00 – M3 (December) – 3 Month Moving Average

U.S 13:30 – Advance GDP (Q4)

U.S 14:55 – Final Michigan Sentiment (January)

Sterling / Euro and US Dollar exchange rates

A dovish Fed Press Conference in the US frees the Eurozone from the headlines but the US Dollar replaces the Euro in the cage of concern. US Central Bank Chairman Ben Bernanke kept the interest rate at 0.25% and indicated that it is unlikely to rise until 2014, more than a year beyond its previous guidance, this immediately pushed down Treasury bond yields and stoked media concern that more quantitative easing is fast approaching. Thomas Simons, a money market economist at Jefferies & Co. Described Bernanke as having “the finger on the trigger [of quantitative easing].”

The Pound made gains against the US Dollar Exchange Rate, growing to 1.569 (10:36 GMT) on the back of the Fed’s mild monetary outlook. Subsequently the Pound to Euro Exchange Rate has fallen to 1.192 (10:36 GMT) as investors are deterred by the prospect of long term low interest rates on both sides of the pond (it is highly likely that the Bank of England will feel it necessary to keep interest rates down as long as the US does).

Bernanke’s press conference indicated that US inflation is falling further than expected and that economic recovery is not keeping up with growth forecasts: “The framework makes very clear that we need to be thinking about ways to provide further stimulus if we don’t get improvements in the pace of recovery and normalization of inflation.” The target rate for inflation is 2.0% but currently stands at 1.7% and unemployment is currently above 8.0% with projections suggesting it will not drop below this figure in 2012. The ultra-low interest rate of 0.25% has brought in $2.3 trillion in long-term securities since 2008 when it was brought in to help stimulate growth and economic recovery.

In a return to familiar territory, the Eurozone has once more received substantial criticism from a respected economic critic. Speaking yesterday at the World Economics Forum in Davos, George Soros castigated Eurozone leaders for their perceived “lack of understanding of how financial markets work,” and stated that harsh austerity is hopeless when growth is needed: “The trouble is that the austerity that Germany wants to impose will push Europe into a deflationary spiral.”

Soros’ view that the Eurozone is crumbling fast from within, with vast gulfs opening up between member states which make it impossible to govern and subsequently leave fringe government members powerless (he described the EU as “undemocratic”) were echoed by head of UNI Philip Jennings who told the forum that: “Technocrat governments are playing with political gunpowder. The Eurozone is going too far.”

As the summit got under way yesterday Portugal’s borrowing costs rocketed to insatiable levels; 3-year debt yields reached 19.4% and 10-year bond yields reached 14.6%. Following Soros’ remarks the Euro to US Dollar Exchange Rate dropped a cent falling below 1.300, but managed to rally back up to 1.316 (10:36 GMT) when the US Fed speech took centre stage.

Today’s Exchange Rate Data

EU 07:00 – German Consumer Confidence (February)

US 13:30 – Durable Goods Orders (December)

US 13:30 – Leading Indicators (December)

NZ 21:45 – New Zealand Trade Balance (December)

JP 23:50 – Bank of Japan Policy Meeting Minutes

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

The bubbling troubles that circulate around the cauldron that is the Eurozone debt crisis are approaching boiling point according to the IMF. The International Monetary Fund has cut its world growth outlook to 3.3% from 4.0%, citing the ‘Euro area economy’ as the primary concern. Eurozone growth has been cut from 1.1% down to a contraction of 0.5% and UK growth has been slashed from 1.6% to 0.6% due to the area entering a ‘perilous new phase.’

The Pound to Euro Exchange Rate has been fluctuating around the 1.200 mark this week, and currently stands at 1.199 (10:42 GMT). The Pound to US Dollar Exchange Rate grew slowly but steadily this week to 1.563, but this morning has seen the cable drop down to 1.558 (10:42 GMT).

The UK economy faltered in Q4 according to the latest release from National Statistics. GDP fell by 0.2% and many believe that we are currently back in recession (a technical recession consists of 2 consecutive quarters of contraction) but of course we won’t know for sure until Q1′s figures are released for 2012.

January’s Bank of England Minutes showed that on January 11th and 12th the Monetary Policy Committee voted unanimously in favour of maintaining the 0.5% interest rate and £275 billion current level of asset purchases. The Minutes showed that regarding future Quantitative Easing measures the jury is still out; with one set of members looking to increase the current asset purchase scheme in the coming months to aid inflation targets, while the other set who have more confidence in inflation are keen to retain the current level.

Greek Crisis talks appeared to be building up momentum at the start of the week but the negotiations fell at the pivotal moment; Eurogroup finance ministers have rejected Greek bondholders’ demands for 4.0% coupons. Banks and other private institutions represented by the Institute of International Finance (IIF) were gunning for a minimum of 4.0% interest on the debt they hold if the nominal value is to be slashed by 50%. Greece, with the backing of the Eurogroup and the International Monetary Fund, has stated that it is not prepared to pay over 3.5% on the coupons.

The conflict of ideas has left the talks at a standstill and increases the chances that the Greek government will pass an involuntary bill that forces bondholders into taking the cuts. This would allow Private Sector Involvement companies to trigger Credit Default Swap payments and could lead to a free-for-all in the Eurozone if the fear of default catches on.

Markets have not reacted in great vigour to the breakdown in the deals and bond auctions have gone surprisingly well this week. In Spain 3-month yields dropped from 1.735% to 1.285% and 6-month paper bills fell from 2.435% to 1.847%. The ever-steady Netherlands who retain their AAA credit rating, sold 30-year debt with yields falling from 4.03% to just 2.69% and €495 million of 2013 bonds with virtually no yield at 0.074%.

The Eurozone received some positive data releases yesterday with German Purchasing Manager Index Services and Purchasing Manager Index Manufacturing both breaching the crucial 50.0 figure that marks the line between contraction and growth. PMIS continued its rise from 52.4 up to 54.5, and PMIM beat estimate growth figures to rise from 48.8 to 50.5.

And German IFO results continued in a similar vein of form this morning, with Business Climate improving from 107.3 to 108.3 and Expectations rising from 98.6 to 100.9. Current Assessment also stands above 100 at 116.3 showing that Germany is continuing to push forward even while some of its Euro empire states appear to be crumbling.

Today’s Exchange Rate Data

EU 09:00 – German IFO – Expectations (January)

UK 09:30 – BoE Minutes (January)

UK 09:30 – GDP Q4 (Q4)

EU 13:15 – ECB President Mario Draghi’s Speech (January)

US 17:30 – Fed Interest Rate Decision (January)

By John Cameron

Foreign Currency Market Update – GBP / AUD Update

The Pound has started 2012 firmly on the back foot against the Australian Dollar, sending the GBP AUD pair to a new multi-year low of 1.4712 on January 17th. Sterling rejected this level in the three sessions which followed the downward move, marking it a key level of support moving forward. The GBP AUD exchange rate has barely recovered in the week which has followed the new low, leaving the pair delicately poised. If upcoming global data releases are positive in tone and appetite for risk improves, then a break down through the 1.4712 level of support can not be ruled out. Consecutive closes below the level would send out a strongly negative signal for the pair. Conversely, if market participants get a renewed attack of the jitters, perhaps because of bad news emanating from the eurozone regarding the region’s debt crisis, then it is possible that the GBP AUD exchange rate will improve and settle back above the 1.5000 level, with August’s 10-month high of 1.6390 providing a medium-term target.

Last Week

Last week’s session provided further evidence that the UK’s real economy remains under pressure, as the British government’s austerity measures start to kick in with a vengeance. Last Wednesday’s official UK Unemployment data provided grim reading for investors holding Sterling-denominated assets. The numbers showed that British joblessness had risen by some 118,000 in the three months to the end of November, 2011, sending UK Unemployment to 2.68m – its highest level for 17 years. Bank of England Monetary Policy Committee member, Adam Posen, added fuel to the fire earlier this week by stating that British unemployment was set to increase steadily over the next two years due to a process of rationalisation, as firms in unproductive sectors of the UK economy jettison unneeded workers. The mood of gloom regarding the state of Britain’s economy was increased by last Monday’s release of a report by the Ernst & Young ITEM Club, a widely-respected independent think-tank which uses the UK Treasury’s economic model to forecast key economic indicators. The ITEM Club predicted that Britain’s economy contracted in the last quarter of 2011 and will show further contraction in the first three months of 2012, meaning that the UK is entering a double-dip recession.

Heads Up

*Denotes the importance of the data item *** being the highest level.

***Preliminary estimate of Q4 GDP is out on Wednesday (09:30) with markets looking for a 0.1% contraction quarter on quarter, and 0.8% annualised growth
**Bank of England minutes from the last meeting are out at the same time as the GDP data. The market will be looking for any changes in the panel’s interest rate bias and comment on the size of the asset purchase facility (otherwise known as quantitative easing).

***Australian CPI Inflation data for Q4 2011, released in the early hours of Wednesday morning

Outlook

There appears little hope that positive UK data releases will push the Pound higher against the Aussie in the coming week. A more likely scenario for an improvement to the GBP AUD exchange rate would be a drop-off in global appetite for risk. Two ongoing situations have the potential to provide such a shift out of risk – the fallout from the current Iranian oil embargo and the eurogroup’s ongoing failure to agree a deal with Greece’s creditors.

The EU’s embargo on the Iranian oil industry, which was announced yesterday, was intended to provide a statement of intent that the West will not tolerate Iran’s continuing nuclear programme. Iran’s immediate response to the embargo was to threaten to close the strait of Hormuz, through which one fifth of the world’s oil supply passes. Such an action would have a pronounced negative effect on global economic activity, potentially causing a sharp weakening of the AUD.

Meanwhile, global stock markets are down on the day today due to the eurogroup’s ongoing failure to agree an agreement with Greece’s creditors on a settlement for sums owed. The institutional investors who are owed money are holding out for a 4% yield on the new long-term Greek bonds which eurozone Finance Ministers have proposed, while the eurogroup, led by President Jean-Claude Juncker, appear in no mood to give way. If the impasse continues, then a mini-recovery is possible for the GBP AUD pair.

By John Cameron

Foreign Currency Market Update – GBP / NZD Update

The GBP NZD exchange rate dipped to 1.9041 on January 18th, its lowest level since September last year. The move coincided with a sharp forward move for global equities markets which began on 19th December and ran out of steam in the middle part of this month. Share markets traditionally enter an uptrend in the latter part of December in anticipation of fresh investment by institutional investors in January. Such a move is commonly referred to as the ‘Santa Claus Rally’. This year’s Santa Rally caused the benchmark S&P 500 share index to accumulate by 10% from 19th December to the middle part of this month, signalling the return of a ‘risk-on’ trading environment. This sent the risk-sensitive, commodity-export driven NZD higher against the majority of the other sixteen most-actively traded currencies. The GBP NZD rate has held above last Wednesday’s near-term low of 1.9041, setting it as a significant level of resistance in this market.

Last Week

Last week’s fundamental UK data releases were far from encouraging, placing additional pressure on the Pound. The government’s official unemployment figures, released last Wednesday, showed that joblessness has risen to a seventeen-year high of 2.68m.

The Ernst & Young ITEM Club further turned the knife into Sterling later in the week, with the release of a report which predicted that the UK’s fragile economy is about to slip into recession once again. The ITEM Club is a respected independent think tank which uses the UK Treasury’s forecasting model to make predictions on the future direction of the British economy. The report predicted that the UK economy shrank in the last three months of 2011 and is set to contract once again in the first quarter of 2012, making grim reading for clients needing to sell Sterling.

Meanwhile, last week saw domestic inflation data released in both the UK and New Zealand. Tuesday’s UK CPI Inflation figure for December showed that British prices are increasing at 4.2% versus November’s counterpart figure of 4.8%. This was in line with market expectations, so had little effect on the Pound. Wednesday’s New Zealand quarterly inflation numbers for the last three months of 2012, showed a pronounced dip in the rate of price rises from 4.6% in Q3 to 1.8% in Q4. The quarter four number was significantly lower than analysts’ predictions of a 2.6% print, a factor which is likely to weigh on investors’ expectations of a New Zealand interest rate hike any time soon.

Heads Up

*Denotes the importance of the data item *** being the highest level.

***Preliminary estimate of Q4 GDP is out on Wednesday (09:30) with markets looking for a 0.1% contraction quarter on quarter, and 0.8% annualised growth
**Bank of England minutes from the last meeting are out at the same time as the GDP data. The market will be looking for any changes in the panel’s interest rate bias and comment on the size of the asset purchase facility (otherwise known as quantitative easing).

***Reserve Bank of New Zealand Rate Decision on Wednesday at 2000hrs GMT
**NZ Trade Balance Figures for December at 2145hrs, Wednesday

Outlook

With the Pound seemingly down on its uppers, thanks to the tame nature of recent UK data releases, clients needing to purchase NZD in the near-term will be hoping for a weakening of the NZD in order to take the GBP NZD exchange rate higher.

Such a situation could be elicited by a sharp drop in global stock markets caused by a scaling back of appetite for risk by global investors, which would severely hamper the Kiwi Dollar’s progress. If Iran steps up its threat to disrupt global oil supplies following this week’s announcement by EU Foreign Ministers that they were set to impose an embargo on the Iranian oil industry, then risk could once again be off the menu.

Likewise, a continuance of the debt stand-off between the eurozone Finance Ministers and Greece’s creditors regarding the terms of any potential settlement, would also have the potential to send stock markets lower and the NZD weaker.

The Reserve Bank of New Zealand is expected to announce that it is maintaining its key lending rate at 2.50% tomorrow night. A surprise cut would lead to pronounced downside pressure on the Kiwi Dollar, bringing the 2.0000 level back into view for the GBP NZD exchange rate.

By John Cameron

Foreign Currency Market Update – GBP / ZAR Update

The Pound spent the Christmas period and much of the first three weeks of the New Year under heavy selling pressure against the Rand, due to a combination of weak UK data releases and general support for the South African currency thanks to an increase in investor’s appetite for riskier assets. This took the GBP ZAR exchange rate to a new 3-month low of 12.2120 on January 19th which should now act as a key level of support for the pair. Demand for the Rand has ebbed since this significant low was reached, as investors moved to scale back their exposure to risk. This move has seen the pair trade close to 12.50 during today’s session; if the risk-off trading environment persists, then a revisiting of 13.00, which was last seen in the week preceding Christmas, can not be ruled out.

Last Week

Bad news stories dominated for Sterling last week. Official government figures released on Wednesday showed that British unemployment hit a seventeen year high of 2.68m in the three months to the end of November 2011. Widely-respected think-tank, the Ernst & Young ITEM Club increased downward pressure on the Pound when they released a report which had used the UK Government’s official economic modelling software to predict that the UK economy is about to double-dip its way into another recession. Tuesday’s UK inflation data show that domestic consumer prices are rising at a slower rate of 4.2%, as of last month. A UK interest rate hike appears further away then ever. Meanwhile, South African interest rates remain at 5.5% and there is no sign that South Africa’s Central Bank is considering cutting from this level. The last time the South African Reserve Bank cut interest was in September 2010.

Heads Up

*Denotes the importance of the data item *** being the highest level.

***Preliminary estimate of Q4 GDP is out on Wednesday (09:30) with markets looking for a 0.1% contraction quarter on quarter, and 0.8% annualised growth
**Bank of England minutes from the last meeting are out at the same time as the GDP data. The market will be looking for any changes in the panel’s interest rate bias and comment on the size of the asset purchase facility (otherwise known as quantitative easing).

Outlook

If the ITEM Club’s predictions come to pass, then the official UK government GDP data released tomorrow, is likely to be supportive for the Pound. However, a forward move for the GBP ZAR exchange rate looks possible if institutional investors continue to shun risk. If Iran’s rulers follow through on their threats to throttle global crude oil supplies following this week’s EU embargo on the Iranian oil industry, then downside is likely for both global share markets and for the risk-sensitive Rand. An escalation of the standoff between eurozone policy-makers and Greece’s creditors would be likely to decrease global appetite for risk. If either situation arose, then a renewed run at the key 13.00 level could be possible for the GBP ZAR exchange rate.

By John Cameron

Foreign Currency Market Update – GBP / CAD Update

The Pound has been down on its luck against the Canadian Dollar for the past month or more. During the same period, the CAD had been well-supported in the currency markets. The traditional Santa Rally saw global equities markets gain significant ground in the four weeks from mid-December. This benefitted the Canadian Dollar more than most currencies due to the Canadian economy’s dependence on the export of commodities. These factors combined to send the GBP CAD exchange rate from above 1.6100 in the week before Christmas all the way down to a 4-month low of 1.5545 on Tuesday 17th January. The pair has improved to trade back above 1.5800 over the last week, as speculators take profit, making 1.5545 a strong level of support in the market.

Last Week

Last week’s UK economic data releases suggest that the British economy is faltering, adding to the downside pressure on Sterling. Tuesday’s UK CPI Inflation figure for December showed at 4.2%, against November’s counterpart number of 4.8%. With UK prices rising at a decreased rate, there is little reason to think that the Bank of England will raise British interest rates for some time to come. Wednesday’s UK unemployment data showed that British joblessness has reached a seventeen year high of 2.68m. Bank of England Monetary Policy Committee member Adam Posen suggested earlier in the week that British unemployment is set to rise over the next two years, heaping further pressure on the Pound. Meanwhile, the highlight of Canada’s data schedule for last week saw the Bank of Canada maintain interest rates at their current level of 1.00%. Friday’s Canadian inflation data for December came out lower than anticipated at 1.9%, suggesting that Canada’s central bank may also opt to keep rates at their current low level for the remainder of the year.

Heads Up

*Denotes the importance of the data item *** being the highest level.

***Preliminary estimate of Q4 GDP is out on Wednesday (09:30) with markets looking for a 0.1% contraction quarter on quarter, and 0.8% annualised growth
**Bank of England minutes from the last meeting are out at the same time as the GDP data. The market will be looking for any changes in the panel’s interest rate bias and comment on the size of the asset purchase facility (otherwise known as quantitative easing).

No further Canadian data releases of note for the remainder of this week.

Outlook

Having broken down to a key low of 1.5545 last Tuesday and then convincingly rejected it, GBP CAD will need a fundamental push in order to make a renewed run at this level. The Canadian economy is highly reliant on exports of crude oil, meaning that events in Iran could have a pronounced effect on CAD moving forward. This week’s EU embargo on the Iranian oil industry has elicited angry threats from the Persian state’s rulers, who warned earlier today that they may act to shut down the Strait of Hormuz, through which 20% of the world’s output of crude oil passes, on its way to lucrative Western markets. If Iran’s leaders make good their threat, then Canada’s economy could benefit through increased demand for its key export, strengthening the CAD and seeing the GBP CAD exchange rate make a renewed run at last week’s low.

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

The Pound declined against the Euro exchange rate yesterday, losing all of Friday’s gains up to 1.2080, to record a low of 1.1952 by lunchtime, after an industry report showed that company profit alerts rocketed in the fourth quarter, adding to signs that the economy is heading towards a recession. We said last week that the Pound seems to be losing momentum against the Euro and it has now declined for five days out of six, indicating that the trend is turning negative and, barring the odd blip, we could see a move back down towards 1.1732.

The Pound lost ground against all but two of the 16 most actively traded currencies and there is speculation this week that the fourth quarter growth figures will show a contraction in growth during the fourth quarter. A separate report from the Bank of England will also give us an insight into the prospect of further quantitative easing next month, with the current round of bond purchases set to finish in February.

Both reports are expected to be negative for the Pound but the UK currency is still deriving support from its position outside the Euro-zone and the Pound will remain in demand, especially if a Greek default is on the cards. The Euro found support yesterday, after the French Finance Minister Francois Baroin said negotiations on Greek debt are making “tangible progress.”

The Pound continued to take advantage of broad Dollar exchange rate weakness during the day and pushed to the highest level in two weeks at 1.56 before drifting weaker. Bank of England policy maker Adam Posen stated that the downside risks to the economy had declined over the past few weeks and this will tend to dampen expectations of aggressive action from the Central Bank, especially considering Posen has been the most dovish member of the MPC.

However, Posen said that policy makers will increase quantitative easing measures if new growth and inflation forecasts justify an expansion of the program. The MPC left the target for bond purchases at £275 billion this month and some officials have said that more may be required. Reports on preliminary GDP in the fourth quarter will be watched closely this week for signs that the economy contracted in the final three months of the year.

This should in effect support demand for the Pound but the flow of defensive demand for Sterling will be watched closely with any sustained improvement in Euro confidence likely to curb Sterling buying support. In terms of economic data, the focus today will be on the latest government borrowing data, given the focus on budget spending trends.

Euro / US Dollar exchange rates

There was further evidence of renewed demand for the Euro exchange rate yesterday, which helped push the single currency to the highest level this year versus the U.S Dollar with a break above 1.30. It’s no coincidence that EUR/USD breaking higher also means the single currency is making gains versus the Pound and there were further gains for European stocks as liquidity levels improved.

Rising stocks had a positive impact on risk appetite, which reduced defensive demand for the Dollar and the Yen as safe haven currencies, as well as helping to improve confidence surrounding the Euro. There were suggestions from German government officials that they might consider running the EFSF in tandem with the ESM in an emergency situation.

There was further talk on Greek debt restructuring during the course of the day with initial optimism that a deal could be agreed. In the event, the Eurogroup meeting rejected the deal put forward by creditor negotiators and there will be fresh negotiations aimed at reaching an agreement by mid-February. Given that Germany also rejected any increase in the Greek bailout amount, there was fresh speculation over a hard default.

Today’s Exchange Rate Data

EU 08:58 – Manufacturing PMI (January) – Services – Composite

U.K 09:30 – PS Net Borrowing (December)

EU 10:00 – Industrial Orders (November)

By Jon Beddell

Foreign Currency Market Update – GBP / USD Update

Sterling entered the New Year in bad form. We were languishing close to 18 month lows around 1.53 with no apparent direction. In fact the last three months have been choppy and trendless, and with much of the focus on Europe and the sovereign debt issues there, no real catalyst has been evident to prompt a major move in the Sterling/Dollar market. That remains the case now. With European bond yields drifting lower it could be said that focus is at least temporarily blurred compared with a few weeks back when Italian yields hit 7% (the level that triggered the Greek meltdown), which leaves some room for other themes to enter the picture.

Last Week

There were a few noteworthy snippets from last week. The inflation beast is at last looking a little tamer, with core price inflation dipping to 4.2% from 4.8% last month, and retail prices taking a similar dip to 4.8% from 5.2%. Further moderation is expected as a result of last year’s VAT increase falling out of the comparatives from January. Comparative measures in the US also dipped a little with consumer price inflation down ten basis points to 3.0%. UK unemployment ticked higher to 8.4%, while US jobless claims were lower than expected in the early part of January. If anything drove the Dollar last week it was generally buoyant stock market trading which helped whet risk appetite and drive flows away from safe haven currencies into riskier assets like the Aussie dollar and to a lesser extent Sterling.

Heads Up

*Denotes the importance of the data item *** being the highest level.

**The UK’s latest public borrowing figure for December is out on Tuesday with £13.4bn of borrowing expected.
***Preliminary estimate of Q4 GDP is out on Wednesday (09:30) with markets looking for a 0.1% contraction quarter on quarter, and 0.8% annualised growth
**Bank of England minutes from the last meeting are out at the same time as the GDP data. The market will be looking for any changes in the panel’s interest rate bias and comment on the size of the asset purchase facility (otherwise known as quantitative easing).

***US interest rate decision on Wednesday evening.
**Durable goods orders on Thursday (market is expecting +2%)
**Leading indicators on Thursday (this is a measure of overall economic activity and markets are expecting a figure of 0.7%)

Outlook

European bond yields have dropped off steadily over the last week or two, which effectively brings the sovereign debt crisis back to an uncomfortable simmer. Italian yields went well above 7%, the level that triggered total meltdown for Greece, but currently trade back around 6.15%. The Euro has rallied a couple of cents against the US dollar and at least halted its slide against the Pound since the New Year. Risk appetite is improving and with that the US Dollar tends to fall. However, Sterling has been confined in a relatively tight range over the last few weeks and we would need to see a clear break above 1.56 to become more optimistic from a technical perspective.

By Jon Beddell

Foreign Currency Market Update – GBP / EUR Update

The old adage “one swallow doesn’t make a summer” has been the first proverb to spring to mind when reviewing Sterling’s performance over the last few years. We’ve seen several attempts at recovery but always ended up drifting lower again. It seems that there’s been little to chose between the two currencies, and whenever we have seen a rally Sterling has always failed to break far above the 1.22′s. It made its best attempt in August 2010 when it topped the giddy heights of 1.2227. From there we drifted back to 1.12, and even saw the 1.10′s during 2011. However, it could be said that we’re seeing more than a single swallow this time, as we’ve actually managed to make a new high for six consecutive months. A single swallow may not herald summer but surely six months of higher highs must indicate some sort of thaw in Sterling’s hitherto frozen fortunes?

Last Week

There were a few noteworthy snippets from last week. The inflation beast is at last looking a little tamer, with core price inflation dipping to 4.2% from 4.8% last month, and retail prices taking a similar dip to 4.8% from 5.2%. Further moderation is expected as a result of last year’s VAT increase falling out of the comparatives from January. European inflation dipped a little to 2.7% from 2.8%. UK unemployment ticked higher to 8.4%.

Heads Up

*Denotes the importance of the data item *** being the highest level.

**The UK’s latest public borrowing figure for December is out on Tuesday with £13.4bn of borrowing expected.
***Preliminary estimate of Q4 GDP is out on Wednesday (09:30) with markets looking for a 0.1% contraction quarter on quarter, and 0.8% annualised growth
**Bank of England minutes from the last meeting are out at the same time as the GDP data. The market will be looking for any changes in the panel’s interest rate bias and comment on the size of the asset purchase facility (otherwise known as quantitative easing).
*In Euro land there are a range of purchasing managers survey’s out on Tuesday morning. These indices give a measure of economic activity in the manufacturing and service sectors.

Outlook

European bond yields have dropped off steadily over the last week or two, which effectively brings the sovereign debt crisis back to an uncomfortable simmer. Italian yields went well above 7%, the level that triggered total meltdown for Greece, but currently trade back around 6.15%. The Euro has rallied a couple of cents against the US dollar and at least halted its slide against the Pound since the New Year. However, given the fact that Sterling has been in the ascendancy and the Euro zone’s problems are far from resolved, Sterling looks likely to edge higher. The big question comes at 1.22. A break above there would be highly significant, but we’ve been here before so we advise clients to remain cautious and consider hedging at least half of any Euro exposure at current levels.

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

Following on from last week, the Pound continued to lose momentum against the Euro exchange rate, falling back towards 1.1950 in early trading on Thursday and from a technical perspective, the market seems to be edging lower with the main support level in the region of 1.1732. It is possible that the Pound will continue to depreciate versus the single currency, amid speculation of a contraction in economic growth during the fourth quarter and the possibility of further quantitative easing from the Bank of England next month.

Data last week showed that the number of Britons out of work and claiming jobless benefits had risen to 2.7 million in the quarter through November and government officials are becoming increasingly uneasy that the rising unemployment rate will push the economy into another recession. The Bank of England governor Mervyn King has reacted to the data by saying rising unemployment is threatening to cancel out the benefit of falling inflation on consumer spending and is threatening the economic recovery altogether.

The Pound continued to edge higher against the U.S Dollar exchange rate, however, as UK stocks rose for four straight days and the improvement in risk appetite reduced the appeal of the Dollar as a safe haven. The Euro rallied to the highest level in two weeks against the U.S Dollar, as positive auction results in Spain boosted optimism that the sovereign debt crisis is being contained.

The Pound maintained a firm tone against the Dollar, rising to a high above 1.55. Underlying confidence in the economic outlook remains very fragile and there were further long-term concerns surrounding the debt situation, as consumer credit levels remain high. There were also fears surrounding the banking sector, as balance sheets remained unsustainable from a longer-term perspective.

Although Euro-zone fears have eased slightly, there is still strong demand for UK bonds with benchmark yields remaining at record low levels following Thursday’s debt auction. While defensive demand remains strong, there will be scope for further underlying Sterling support even while the economic data continues to disappoint.

The Pound rose through 1.20 against the Euro exchange rate by the close of trading on Friday, after reaching a low of 1.1938, while the UK currency also rose further versus the Dollar, after a government report showed that UK retail sales increased in December, as stores cut prices in an attempt to attract consumers. Sales rose 0.6% from November, when they fell a revised 0.5% and from a year earlier sales were up 2.6%.

However, the near-term gain in sales may not last considering UK unemployment has continued to rise and inflation outpaces wage increases. Consumer confidence is bound to fall and with global growth cooling and the Euro-zone crisis weakening demand for exports, the UK economy is heading perilously for another recession.

There is a host of significant economic reports released this week with the focus falling on the preliminary GDP forecast for the fourth quarter. It is expected to show a moderate contraction in growth during the final three months of 2011, which would increase calls for more quantitative easing from the Bank of England and weaken the Pound.

Elsewhere, the CBI industrial and distributive trades surveys feature, along with consumer confidence and public finances data. The Bank of England January minutes will also be watched closely and although a unanimous decision to keep the bond-purchasing plan at £275 billion is expected, the tone and language used will be heavily scrutinised for signs that the MPC would extend quantitative easing measures next month.

Euro / US Dollar exchange rates

The Euro exchange rate maintained a firmer tone against the Dollar and challenged near-term resistance levels in the region of 1.29. The latest Spanish bond auction was once again stronger-than-expected in terms of investor interest, which helped underpin the Euro. A solid French auction also maintained expectations that the ECB’s bullish stance was having a positive impact on liquidity.

There was mixed economic data in the U.S with housing starts slightly below expectations at an annual rate of 0.66 million. In contrast, there was a sharp drop in weekly jobless claims to 352,000 from 402,000 previously, while the Philly Fed index edged lower on the month. Consumer price inflation was unchanged for December with core prices rising just 0.1% but the data had a muted impact in the market with swings in risk sentiment the domineering factor.

Although financial markets are largely being driven by swings in risk sentiment, the tone of the week could be set by the extent of progress in the talks to restructure Greece’s debt and whether a default can be avoided. The EU Head of State Summit begins today and in the U.S, the FOMC meets amid recent evidence that the U.S economy is improving.

Today’s Exchange Rate Data

EU – Eurogroup / Ecofin Finance Ministers Meeting (continues to Tuesday 24th)

EU 15:00 – Flash Consumer Confidence

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

The Pound continued to lose momentum against the Euro exchange rate, falling back towards 1.1950 in early trading and from a technical perspective, the market seems to be edging lower with the main support level in the region of 1.1732. It is possible that the Pound will continue to depreciate versus the single currency, amid speculation of a contraction in economic growth during the fourth quarter and the possibility of further quantitative easing from the Bank of England.

Data this week showed that the number of Britons out of work and claiming jobless benefits had risen to 2.7 million in the quarter through November and government officials are becoming increasingly uneasy that the rising unemployment rate will push the economy into another recession. The Bank of England governor Mervyn King has reacted to the data by saying rising unemployment is threatening to cancel out the benefit of falling inflation on consumer spending and is threatening the economic recovery altogether.

The Pound continued to edge higher against the U.S Dollar, however, UK stocks rose for a fourth straight day, led by an increase in financial companies shares and the improvement in risk appetite reduced the appeal of the Dollar as a safe haven. The Euro rallied to the highest level in two weeks against the U.S Dollar, as positive auction results in Spain boosted optimism that the sovereign debt crisis is being contained.

The Pound maintained a firm tone against the Dollar exchange rate for a third straight day, rising to a high close to 1.55. Underlying confidence in the economic outlook remains very fragile and there were further long-term concerns surrounding the debt situation, as consumer credit levels remain high. There were also fears surrounding the banking sector, as balance sheets remained unsustainable from a longer-term perspective.

Although Euro-zone fears have eased slightly, there is still strong demand for UK bonds with benchmark yields remaining at record low levels following Thursday’s debt auction. While defensive demand remains strong, there will be scope for further underlying Sterling support even while the economic data continues to disappoint.

Euro / US Dollar exchange rates

The Euro exchange rate maintained a firmer tone against the Dollar and challenged near-term resistance levels in the region of 1.29. The latest Spanish bond auction was once again stronger-than-expected in terms of investor interest, which helped underpin the Euro. A solid French auction also maintained expectations that the ECB’s bullish stance was having a positive impact on liquidity.

There was mixed economic data in the U.S yesterday with housing starts slightly below expectations at an annual rate of 0.66 million. In contrast, there was a sharp drop in weekly jobless claims to 352,000 from 402,000 previously, while the Philly Fed index edged lower on the month. Consumer price inflation was unchanged for December with core prices rising just 0.1% but the data had a muted impact in the market with swings in risk sentiment the domineering factor.

Today’s Exchange Rate Data

U.K 09:30 – Retail Sales (December)

U.S 15:00 – Existing Home Sales (December)

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

The Pound declined against the Euro exchange rate yesterday to a low of 1.1974 and the UK currency continued to lose ground versus the higher-yielding currencies, as recent data suggested that the economy is heading towards another recession. The focus switched to the labour market yesterday and UK unemployment rose to the highest level in 16-years in the quarter through November, increasing concerns of a fourth quarter contraction, as the turmoil in the Euro-zone threatens to derail the economic recovery.

The jobless rate rose to 8.4%, the highest level since January 1996, from 8.1% in the three months through August. The number of people claiming jobless benefits rose for a tenth straight month to 1.6 million, the most in two years. There have been recent forecast that the UK economy contracted at the end of 2011 and the Pound has struggled to gain momentum as a result of the speculation.

The Pound remained largely unchanged against the U.S Dollar exchange rate, despite UK stocks falling for the first time in two days. The Euro made gains for the second day against the Dollar, amid reports that the IMF will seek a $500 billion expansion of its lending resources to protect the global economy. The single currency subsequently rallied against the majority of the major currencies and was further supported by optimism that Greece would resume negotiations with bond holders today and find a resolution to the deadlock.

The improvement in risk appetite reduced the appeal of the Dollar as a safe haven but sentiment will remain fragile. The Australian Dollar has risen to the highest level against the Pound in almost 30 years this week and close to its strongest level this year versus the U.S Dollar, as global risk appetite continued to improve and boost demand for riskier assets. The Aussie is also rising in anticipation of a report that is expected to show an improvement in the labour market.

The Pound found support in the region of 1.5350 against the U.S Dollar and strengthened to a high of 1.5440 through the course of the day, as the Dollar suffered wider losses. Elsewhere yesterday, the latest Nationwide consumer confidence index fell for December to record the second lowest figure ever recorded. There were also expectations that the Bank of England would move towards additional quantitative easing over the next month, which tended to undermine the Pound against the majority of the major currencies.

Euro / US Dollar exchange rates

The Euro exchange rate found support in the region of 1.2750 against the U.S Dollar and challenged resistance levels above the 1.28 level, as there was further pressure for a covering of short positions given the huge positioning bias in favour of Euro selling. There were reports that the IMF was seeking additional funds to bolster its defences against the Euro-zone debt crisis.

The IMF suggested that it would look to increase funding by an additional $600 billion, which would take the total commitment to $1 trillion. There was, however, no indication of how these funds would be sourced, especially with U.S opposition to any increase in its contribution.

Portuguese bond yields continued to rise to record highs yesterday, which increased speculation over a potential default. There was also further uncertainty surrounding the Greek debt position with no immediate debt deal, as talks with creditors resumed. In the U.S, the growth data did not have a major impact during the day, with industrial production rising 0.4% for December, after a revised 0.3% decline for the previous month.

Today’s Exchange Rate Data

EU 09:00 – Current Account (November)

EU 09:00 – ECB Monthly Bulletin Published

U.S 13:30 – Consumer Price Index (December) – Ex Food & Energy

U.S 13:30 – Real Earnings (December)

U.S 13:30 – Housing Starts – Permits

U.S 13:30 – Initial Jobless Claims (w/e 14th January)

U.S 15:00 – Philly Fed Business Survey (January)

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

The Pound declined against the Euro exchange rate yesterday, falling back towards 1.2020, after two consecutive days of gains, as reports emerged that Spain had sold Treasury bills at lower rates even after its credit rating was cut by two levels last week. Demand for Spanish bonds has been particularly solid in the past couple of weeks, which has helped curb Euro selling but sentiment remains extremely fragile.

The market is largely driven by risk appetite at present on the back of rising stock markets and this is helping push gilt yields higher. The economic data in Europe continues to disappoint on the whole, which tells us that current moves are not being driven by fundamentals but the environment of risk appetite could change dramatically at any time.

The UK currency was down 0.5% by midday against the Euro exchange rate, before staging a modest recovery this afternoon. The UK currency was actually up 0.4% versus the Dollar, despite a government report yesterday, which showed UK inflation had receded to 4.2%, compared with 4.8% in November. Slowing inflation will increase the chances of further quantitative easing from the Bank of England with the current round of asset purchases set to conclude in February.

The Pound may struggle to gain momentum in the build up to February’s interest rate announcement on speculation that policy makers will introduce new measures. Ernst & Young LLP predicted earlier this week that a second recession may already be happening starting with a contraction in growth during the fourth quarter. The Pound is declining heavily against the higher-yielding currencies, falling as much as 1% versus the Australian Dollar to the lowest level since 1985.

The Pound was unable to make any headway against the Dollar yesterday and there was evidence of tough resistance in the region of 1.54. Consumer price inflation will continue to fall sharply in the short-term as 2011 tax increases come of the calculation and retail discounting continues. In a testimony to the UK Treasury Committee, BoE governor Mervyn King generally concentrated on technical issues surrounding the banking sector.

There was further speculation that further quantitative easing would be sanctioned by the Bank’s monetary policy committee last month and that has curbed the Pound’s appeal. The UK currency has declined 1.2% against nine developed nation currencies this year, making it the second worst performer behind the Euro. The Pound reached the lowest level since 1985 against the Australian Dollar and continued to lose ground versus the higher-yielding currencies as stocks continued to rise and risk appetite improved.

The Pound may come under further pressure against the majors this morning, amid the release of the latest unemployment data. Jobless claims is expected to rise by another 10,000 and this would bring the increase over the past year to roughly 150,000. The unemployment rate for the three months to the end of November is expected to remain at 8.3%.

Euro / US Dollar exchange rates

The Euro exchange rate found a degree of support in the region of 1.2720 against the U.S Dollar on Tuesday and pushed higher through the course of the day, as short-term sentiment improved. The German ZEW index for business confidence was significantly stronger-than-expected with the headline rate advancing to the highest level in six months.

There was also a further decline in Spanish bond yields in the latest auction, which helped underpin sentiment to a degree. There are still major fears surrounding the divergence within the Euro-zone with German economic gains not matched elsewhere and there were also concerns surrounding political deadlock following the French credit rating downgrade.

There were further talks between the Greek government and bond holders, as they battled to secure a debt-restructuring deal. Even if a deal can be agreed, there will still be fears over a hard Greek default and Fitch Ratings warned that Greece was insolvent and would default soon. In the U.S, the Empire State manufacturing index was stronger-than-expected with an increase in January, ahead of next week’s FOMC meeting next week.

Today’s Exchange Rate Data

U.K 09:30 – Claimant Count (December) – ILO Unemployment (November)

U.K 09:30 – Average Weekly Earnings (November)

U.S 13:30 – Producer Price Index (December)

U.S 14:00 – TICS Capital Inflows (November)

U.S 14:15 – Industrial Productionm (December)

U.S 15:00 – NAHB House Builders’ Sentiment (January)

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

The Pound slipped against the U.S Dollar exchange rate and the Yen, as global risk appetite weakened following the announcement that Standard & Poor’s have cut France’s AAA credit rating and lowered grades for eight other EU nations. The move has reduced demand for commodity driven currencies and assets more sensitive to swings in global economic growth.

The UK currency was 0.5% lower against the Dollar exchange rate and close to the lowest level in 18 months and the downward move continued following reports that Ernst & Young LLP’s Item Club said that the UK economy slipped into a recession during the fourth quarter. Coupled with higher unemployment and slowing inflation, the prospect of further quantitative easing from the Bank of England is increasing day-by-day.

A separate report earlier today from Rightmove Plc showed that UK home sellers slashed asking prices for a third month in January, which emphasizes the fragile nature of the housing market. The Pound is likely to fall even further against the U.S Dollar exchange rate, given the economic outlook and the U.S currency is now benefiting from positive data, as well as, swings in risk sentiment.

The Pound found support below 1.53 against the Dollar exchange rate and rallied through the course of the day, unable to challenge the recent three-month lows just under the 1.5250 level. The report from the Item Club suggesting that the UK might already be in a recession has curtailed the Pound’s momentum against the Euro exchange rate somewhat, as the ongoing debt crisis in Europe has a negative impact on business confidence.

There was also further evidence of stresses within the retail sector, as the Peacocks group was likely to go into administration, after failing to secure a fresh banking facility. The Item Group was, however, optimistic that a deep recession would be avoided. The latest consumer price data will be watched closely this morning and a sharp decline in the annual rate would increase the prospect of further quantitative easing from the Bank of England, possibly as early as next month.

The Pound may continue to derive defensive support from its position outside the Euro-zone and the UK currency is likely to gain backing from fears surrounding the Euro-zone. The Pound continued to decline against commodity driven currencies, falling 3.1% versus the New Zealand Dollar exchange rate and trading close to a record low against the Australian Dollar exchange rate.

Euro / US Dollar exchange rates

The Euro exchange rate found support in the region of 1.2620 against the U.S Dollar exchange rate yesterday and consolidated below the 1.27 level, amid relatively subdued trading conditions as U.S markets were closed for the Martin Luther King holiday. Sentiment for the Euro exchange rate remains extremely fragile following the multiple credit rating downgrades for France among others.

The political deadlock in Greece remains an important focus with debt-restructuring talks stalling on a breakdown in negotiations last week. There were increased concerns surrounding a hard Greek default, as there would be no possibility of Greece making debt payments due in March without a second rescue package.

There was also a surge in Portuguese bond yields through the course of the day, which reinforced concerns over the peripheral European economies and the levels of indebtedness. Standard & Poor’s also downgraded the EFSF credit rating, which will make it more difficult to attract funding. There was technical movement in the market yesterday, with traders reluctant to embark on excessive Euro selling, particularly considering the somewhat oversold positions already held.

Today’s Exchange Rate Data

U.K 09:30 – Consumer Price Index (December) – RPI

U.K 09:30 – DCLG House Prices (November)

EU 10:00 – HICP Final (December)

GER 10:00 – ZEW Index (January)

U.S 13:30 – Empire State / NY Fed Index (January)

CAN 14:00 – BoC Interest Rate Announcement

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

The Pound remained under pressure against the U.S Dollar last week, while the UK currency also lost over 1% versus the Euro on Thursday, following the latest Bank of England interest rate announcement. The Monetary Policy Committee kept interest rates unchanged at a record low of 0.5% and decided against announcing any increase in the quantitative easing plan.

Policy makers have indicated that they will wait for the current round of purchases to finish in February before considering administering anymore and it’s fair to say the improvement in recent economic indicators has increased optimism that the economy is improving. However, the data failed to provide any support to the Pound, as industrial production declined 0.6% in November, while manufacturing output also registered a small decline.

The data is likely to trigger a modest downward revision to fourth quarter gross domestic product estimates. The recent NIESR estimate showed a 0.1% expansion for the fourth quarter but there is still a chance of a contraction in growth. The Pound slipped below 1.20 against the Euro exchange rate, albeit briefly, and the single currency made gains versus the Dollar, after well received bond auctions in Italy and Spain.

The ECB press conference also provided underlying support to the Euro, as peripheral yields fell sharply. The Central Bank left interest rates unchanged at 1% following rate cuts at the two previous meetings. In his statement, the chairman Draghi stated that there was evidence the economy was stabilising and there was no suggestions of a further rate cut next month.

The Euro was subjected to heavy selling pressure on Friday, as rumours spread of an S&P sovereign rating downgrade in up to nine EU nations. The French rating was cut by one notch to AA+ with a negative outlook, while Austria also lost its AAA status. There was an element of relief that there had only been a one-notch downgrade, but there were still important negative implications, as it would make it difficult for reserve managers to hold French debt.

The Pound was unable to regain the 1.54 level against the Dollar on Friday and was subjected to heavy selling pressure to a low of 1.5250 during the U.S session. The latest producer price data was sharply weaker-than-expected with a decline in input prices to the lowest annual rate for 18-months. Markets will therefore be expecting a sharp decline in consumer price inflation on Tuesday, which will reinforce expectations of a move to additional quantitative easing.

Last night, the latest Rightmove house price index registered a decline of 0.8% for December, after a 2.7% fall previously, maintaining expectations of underlying weakness, which would tend to impact on consumer spending. There was some evidence of fresh defensive Sterling demand given the Euro-zone ratings cuts and it advanced back above 1.20 by the close of trading.

Elsewhere this week, Wednesday’s unemployment report for December should reflect the impact of a weak UK economy on the labour market, with the claimant count forecast to rise by another 10,000. The jobless rate for the three months to November is expected to remain at 8.3%. Friday’s retail sales report for December will also be watched closely and a sharp recovery in sales from the previous month’s decline of 0.4%.

Euro / US Dollar exchange rates

The Euro initially maintained a firm tone on Friday but the credit rating downgrades in Europe pushed the single currency lower again. There was a further decline in peripheral bond yields and pressure to curb short positions ahead of the weekend. After a very strong Spanish bond auction, the latest Italian sale was slightly disappointing in terms of investor demand.

The U.S economic data will be watched closely in the run up to the end of January FOMC meeting. The first of the January sentiment indices will feature this week in the form of the Empire State and Philly Fed manufacturing indices. December’s industrial production data will provide an insight into the state of gross domestic product at the end of the fourth quarter.

Today’s Exchange Rate Data

U.S – Martin Luther King Market Holiday

Sterling / Euro and US Dollar exchange rates

Today is Friday the 13th but don’t worry folks, GDP grew by 50% less than expected last year, manufacturing and industrial production faltered in line with a hugely disappointing festive consumer report and on top of that the wounded Eurozone is even making gains against the Pound. Surely we’ve had our fair share of bad luck already?

The Euro exchange rate posted significant gains yesterday afternoon on the back of ECB President Mario Draghi’s speech. The ECB maintained its record low interest rate of 1.0%. Mario Draghi made claims – concurrent to previous reports – that liquidity across the 17-nation bloc has improved since the Long-Term-Refinancing-Operation (LTRO) gave out €489 billion in 3-year low-interest loans. He stated that the banks making large ECB deposits were different to those who took out the loans; this claim looked justified as borrowing costs fell dramatically yesterday in the Eurozone. Spain sold €10 billion of bonds yesterday morning, with 3-year note yields falling from 5.187% to 3.384%, and Italy managed to sell €12 billion of bills, with 1-year bond yields falling by over 50% from 5.952% to 2.735%.

The Euro exchange rate strengthened against both the Pound and the US Dollar following the successful press conference. The Pound was not helped by unsatisfactory Manufacturing Production figures and Sterling was dealt another blow when the National Institute of Economic and Social Research announced that estimated GDP grew by as little as 0.1% in the fourth quarter. This implies that the economy grew by just 1% in 2011, less than 50% of 2010′s 2.1% growth. This stoked fears that Britain could be slipping into contraction.

UK Producer Price Index figures released today showed less growth than expected for both input and output figures thus signalling more bad news for the Pound. The US Dollar declined against most of its rivals in the overnight Asian session due to an improvement in risk appetite following a positive day for the Eurozone. The Euro could post further gains today, as Italian 10-year bonds have dropped below the psychological 7.0% to 6.48% this morning, and EU Trade Balance figures vastly improved from €1.0 billion to €6.9 billion. The current Pound to Euro Exchange rate stands at 1.196; the current Pound to US Dollar exchange rate stands at 1.535; and the current Euro to US Dollar exchange rate stands at 1.285.

Today’s Exchange Rate Data

UK 09:30 – UK Producer Price Index (December)

EU 10:00 – European Monetary Union Trade Balance (November)

US 13:30 – US Import Price Index (December)

US 13:30 – US Trade Balance (November)

US 14:55 – Reuters/Michigan Consumer Sentiment Index (January)

Sterling / Euro and US Dollar exchange rates

If each day of this week were to be described as a character from Roald Dahl’s Charlie and the Chocolate Factory in terms of data releases, then yesterday would be Charlie Bucket; poor and penniless, and today would most definitely be Augustus Gloop. This week has been practically devoid of economic data thus far, but like the ‘enormously fat, gluttonous, and greedy boy,’ today has hogged all of the financial releases.

The headline grabbers are without a doubt the Central Banks’ rate decisions, with both the ECB and the BoE set to announce whether they will drop interest rates even further. The general market consensus says they will both maintain the current rates of 1.0% ECB and 0.50% BoE. The Pound suffered yesterday against the majors as cautious investors were reluctant to place their funds into Sterling ahead of the rate decision. Weaker than expected November Trade Balance figures hindered the Pound but it seems likely that markets were acting anxiously in the build-up to an important day that also features data regarding the BoE’s asset purchasing scheme.

German Consumer Price Index improved by 0.7% in December and as a result the Euro has made a slight gain against the Pound with the exchange rate falling from 1.210 to 1.203. UK Industrial Production dropped by more than expected in November falling -3.1% year on year compared to an expected fall of -2.2%. The drop in Industrial Production was mirrored in the 17-nation bloc with Euro figures also faring worse than expected, falling by -0.3% compared to a projected growth of that much (0.3%).

US Initial Jobless Claims, Continuing Jobless Claims, and Retails Sales (including and excluding Autos), look set to remain at a similar level, but an unexpected result can never be discounted. US Business Inventories are set to fall from 0.8% growth to 0.4% but the Monthly Budget Statement is predicted to improve from $-137.3 billion down to $-79.0 billion, as the US economy shows slight signs of picking up. The Pound to US Dollar exchange rate has fallen this week from highs around 1.495 to a modest 1.534 as markets await today’s releases.

With Quantitative Easing predicted to remain at its current level of £275 billion in the UK, the primary focus of the day may rest on ECB President Mario Draghi’s speech. Draghi will be expected to address the 3-year-long-term-refinancing operation (LTRO) and comment on its success; to date reports have suggested that the €489 billion of bank loans have failed to reach credit markets and have actually been re-deposited in the European Central Bank itself. If Draghi can convince markets that the LTRO can actually improve liquidity, it could see the Euro receive some support. But the most likely outcome is a negative approach in which he reiterates the severity of the growing crisis and offers some minor hope; this will not please markets and could see the Euro fall against both the Pound and the US Dollar.

Today’s Exchange Rate Data

EU 07:00 – German Consumer Price Index (December)

UK 09:30 – UK Industrial Production (November)

UK 12:00 – BoE Interest Rate Decision (January 12th)

UK 12:00 – BoE Asset Purchase Facility (January)

EU 12:45 – ECB Interest Rate Decision (January)

EU 13:30 – ECB President Draghi’s Speech (January)

US 19:00 – US Monthly Budget Statement (December)

Sterling / US Dollar and Euro exchange rates

Yesterday was a slow day for the foreign exchange rate market; it saw very little in the form of economic data, and in turn very little in the form of exchange rate changes. The Pound opened trading today in an almost identical position to that which it held yesterday against its major rivals. The Euro, US Dollar, Aussie Dollar, New Zealand Dollar, Canadian Dollar, Swiss Franc, and Japanese Yen are all trading within a 1/5 of a cent to what they were yesterday against the Pound. And the trend of no-trend looks set to repeat itself over the course of today with only minor releases that are unlikely to kick up a major buying/selling frenzy.

Germany posted a positive 3.0% Real GDP growth – but that was to be expected given their high Budget Surplus figures released earlier this week – and UK Trade Balance results were slightly poorer than expected (Non-EU Trade Balance equalled minus £5.021 billion compared to an expected minus £5.000 billion, and Goods Trade Balance equalled minus £ 8.644 billion compared to an expected minus £7.868 billion) – but neither release yielded much weight in the currency exchange market.

The Pound has maintained its 15-month highs against the Euro (the rate stands at 1.210 today) and looks set to build upon this from its contradictory status that benefits from both, risk appetite and safe haven flows. With the US Dollar overbought in recent times, some investors have chosen to place their funds into Sterling to benefit from a slightly higher interest rate and to avoid a Dollar trend reversal. Conversely Euro area businesses and investors are sending their funds to UK banks to preserve the value of their assets against a potential Eurozone meltdown. Both practices benefit the Pound.

European Central Bank President Mario Draghi’s decision to try and stimulate the economy indirectly seems to have backfired; since the ECB offered €489 billion in low interest 3-year loans on December 21st, the ECB has received record levels of bank deposits. Large banks have chosen to hoard the money in order to meet their refinancing needs over the next 3 years, rather than to stimulate economic growth through the offering of credit to consumers and small businesses as was intended.

Mario Draghi’s attempt to try and improve credit liquidity was an important step, sadly the execution was flawed; Phillipe Waecther of Natixis Assets Management in Paris stated in an interview: “It’s illusory to think that the measure will translate into credit generation.” As a result many merchants and small businesses have been forced to find credit from less ethical institutions. A report carried out by Italy’s leading retailers association Confeserecenti, announced this week that Italy’s most profitable bank and biggest business enterprise is the mafia.

Among a portfolio of theft, corruption, violence and smuggling, the Italian crime syndicate have taken to loan-sharking in recent times. Due to a euro-wide credit freeze desperate businesses have turned to the mafia for support, unfortunately this comes at a cost; many have been hit with extortionate interest rates and terminal consequences in the event of failed payments.

Reports suggesting that the mafia has an annual turnover of €130 billion (taking 7% of Italy’s GDP out of the economy) have added further stress to the future success of the Eurozone. Sterling looks set to benefit in the short-term from the Euro’s follies – as long as the single currency does not collapse altogether.

Today’s Exchange Rate Data

JP 05:00 – Japanese Leading Economic Index (November)

EU 08:00 – German Real GDP Growth (December)

UK 09:30 – UK Goods Trade Balance (November)

US 12:00 – US Mortgage Applications (December 6th)

US 19:00 – Fed’s Beige Book (January)

The Pound, US Dollar and The Euro exchange rates today

Yesterday French President Nicolas Sarkozy and German Chancellor Angela Merkel picked up the resuscitation baton and continued the long-distance marathon towards economic recovery. This was their 9th set of talks in the last 12 months. The meeting ended characteristically inconclusive; the pair dubbed ‘Merkozy’ reiterated the most pressing points – most of which were already known – on the European agenda.

Merkel warned Greece of the urgency towards which they must impose fresh budget cuts and agree terms with private sector lenders in order to receive their latest aid tranche. Last week Greek Prime Minister Lucas Papademos issued a statement to Greek union and business leaders explicitly addressing this point:

“We need to give out a little so we don’t lose a lot… Without this agreement with the troika and subsequent financing, Greece in March faces the immediate risk of a disorderly default.”

The pair talked of the new EU ‘fiscal compact’ in an attempt to prove to investors that the Eurozone has a clear revival path. The measures, which uninspired investors when they were first unveiled in December, are being prepared for a launch in March at the latest – with a small possibility of implementation at the end of January.

The controversial Tobin tax – the one that UK Prime Minister David Cameron vetoed at the EU summit in Brussels last month – was discussed by the Franco-German leaders. They reaffirmed their desire to employ the EU-wide financial transaction tax, even though Cameron had restated his absolute objection to it in a press conference a day earlier.

Investors reacted tentatively to the talks; an obligatory set of Euro exchange rate buys moved the single currency up by a quarter of a yen, half a US cent, and stemmed the Pound’s 16-month high surge.

This morning the Pound is trading just below yesterday’s rate at 1.208 against the Euro exchange rate, and is minimally improved against the US Dollar exchange rate at 1.546.

Today’s Exchange Rate Data

AU 00:30 – Australian Building Permits (November)

CH 04:05 – Chinese Trade Balance (December)

CA 13:15 – Canadian Housing Starts (December)

US 15:00 – US Economic Optimism (January)

AU 22:30 – Australian Westpac Consumer Confidence (January)

Sterling / Euro and US Dollar exchange rates

Currency exchange markets are in a very similar position this morning to where we left them before the weekend; The Pound to Euro exchange rate is 1.208 and the Pound to US Dollar exchange rate is 1.544. The Pound is holding strong against the Euro ahead of fiscal policy talks today between French President Nicolas Sarkozy and German Chancellor Angela Merkel. The US Dollar benefitted last week from safe haven flows away from the Eurozone debt crisis and strong domestic economic data in the form of Nonfarm Payrolls increasing by 200K – which in turn caused Unemployment to fall from 8.7% to 8.5%.

Merkel and Sarkozy (dubbed ‘Merkozy’) are set to hold talks this morning to discuss the new fiscal compact that aims to fight Eurozone debt and pull the 17-nation bloc out of contraction; the first crisis talk of 2012 will set off where the influential leaders left off on December 2nd (the 8th set of talks in 2011). As the pair have discussed the matter in detail numerous times in the last 12 months investors will be cautious in reacting to their proposed solutions. However if clear guidelines are given towards financial parity, or if a fundamental change is outlined, markets could move back in the Euro’s favour and help it regain some of December’s substantial losses.

Strong data for German Current Account N.S.A in November could help persuade investors that the Eurozone is on a path to recovery. The German Current Account figures detail a €4.3 billion increase from October to December leaving capital flow into Germany at a positive €14.3 billion. German Trade Balance also increased from €12.5 billion in October to €15.1 billion in November; this €2.6 billion shows that Europe’s largest economy is still expanding despite the surrounding crisis. In a strange twist of fate the weakening Euro could actually benefit the German economy in the short-term, as profitable currency exchange rates could be inducing heavier investment from abroad, causing German exports to increase.

As we go through the day look out for economic releases in Germany for Industrial Production, Canada for Consumer Price Index, and USA for Consumer Credit Change. Keeping in line with the contemporary climate of economic crisis; the Franco-German ‘Merkozy’ talks will steal the headlines and dictate which way the markets move.

Today’s Exchange Rate Data

EU 07:00 – German Current Account N.S.A (November)

EU 07:00 – German Trade Balance (November)

EU 09:30 – Sentix Investor Confidence (November)

CA 12:00 – Canadian Consumer Price Index (December)

US 20:00 – Consumer Credit Change (November)

Today’s Euro exchange rate news

The pound has maintained its 15-month high against the Euro exchange rate overnight and the rate currently stands at 1.210. The Pound’s strength can largely be attributed to the Euro exchange rate’s weakness; strong UK Services and Construction PMI figures are helpful, but the rate has been largely dictated by negative market sentiments towards the Eurozone.

Italy’s Unicredit bank announced this week that they are seeking to raise €7.5 billion of new capital as a safety buffer in the case of a Eurozone tragedy. They explicitly cited suspicions that the Eurozone debt crisis could worsen and bring about the exit of one or more Eurozone countries. Unicredit’s lack of refrain in their admission of fear bodes badly for the Euro and investors have reacted cautiously by moving their funds into other currencies. The Euro lost 1.5 cents to the US Dollar, 0.75 cents to the Yen and a further 0.5 cents to the Pound.

Greek PM Papademos has urged his country to push through with tight austerity reforms as quickly as possible: “We have to give up a little so we don’t lose a lot.” In another statement that instilled investors with extreme anxiety, Papademos stated that the country is at risk of defaulting on its debt and leaving the Eurozone unless terms are agreed and the country receives its second bailout package of €130 billion. According to a 1,000+ people poll conducted towards the end of December, 80% of Greeks believe that the government should do whatever it takes to keep Greece in the Eurozone. No doubt the rest of Europe agrees, for although large chunks of Greek debt are being written off, the 17-nation bloc would face severe consequences if Greece were unable to make any of their repayments – France and Germany are especially implicated due to the large amounts of funds they are owed.

Consumer Confidence in the Eurozone has fallen from -20.7 to -21.1 and Economic Confidence in the 17-nation bloc has fallen from 93.8 to 93.3. In another spate of negative economic data for the Euro, Industrial Confidence remained at -7.1, Retails Sales fell by -0.8% in November leaving the figure -2.5% worse off than a year ago, German Factory Orders fell -4.8% in November marking a -4.3% decline from last year, and European Unemployment remained at a high 10.3%.

US Nonfarm Payrolls are expected to rise from 120K to 150K for December but regardless of the result, due to investors’ overarching Eurozone debt crisis concerns, the Dollar is set to strengthen from risk-averse market sentiment. The Euro is currently trading at a low 1.279 against the Dollar, and the Pound has also lost ground to the Greenback, currently trading at 1.548.

Today’s Exchange Rate Data

EU 10:00 – Retail Sales (November)

EU 10:00 – Unemployment Rate (November)

EU 10:00 – Consumer Confidence (November)

US 13:30 – Nonfarm Payrolls (December)

US 13:30 – Unemployment Rate (December)

Yesterday the Pound pushed through one-year highs against the Euro reaching 1.209. The Pound is benefitting from safe haven flows as investors flee the treacherous Eurozone in favour of ‘safer assets’. The S&P 500 stock index futures traded significantly lower in the Asian session as a result of a change in market sentiment away from stocks-correlated currencies towards the safe haven US Dollar. Consequently Sterling retraced gains made earlier this week against the strengthening Dollar back down from 1.570 to 1.555.

Germany kicked off its 2012 bond sales with a successful auction of its benchmark 10-year bund yesterday. Germany sold €4.057 billion of the 2% January 2022 bund with an average yield of 1.93%, down from 1.98% on November 23rd when German paper was heavily undersubscribed. Investors kept a close watch on the auction for the signs of weakness that were present in November, but considering the low yield of the bunds they performed relatively well.

Portugal’s funding costs also fell as they sold €1 billion in 3-month Treasury bills. The yield on the bonds dropped from 4.873% in December to 4.346% at yesterday’s auction. Despite positive bond auctions in the Eurozone the Euro has performed badly this week, largely due to growing fears relating to the sovereign debt crisis.

German Retail Sales fell by -0.9% from October to November, but the year on year figure for November improved by 0.8%, The European Monetary Union’s Producer Price Index showed a marked improvement for the Eurozone with domestic producers of commodities receiving 5.3% more for their products than last year.

Statistics released this morning showed some good news for the UK economy, with the Services PMI remaining in expansion rising from 52.1 to 54.0 in December. Later on today US Initial Jobless claims are expected to fall slightly and Non-Manufacturing Business conditions are expected to improve slightly; both are encouraging for the Dollar.

The Pound is currently trading at 1.210 against the Euro and could grow further dependant on the success of France’s bond auction this morning. France aims to sell a whopping €8 billion of debt today, in the country’s first test of investor appetite in 2012. If the auction goes badly it could trigger more talk of the French AAA credit rating being cut, but if the auction is successful it could alleviate some pressure from under fire President Nicolas Sarkozy (in the short-term at least, with the French Presidential election looming large).

Every New Year shoppers flock to the January sales; Christmas presents get returned; resolutions are broken; turkeys breathe a sigh of relief; and the currency exchange markets return to full functionality. New profit targets are set and new initiatives written up, to ensure rates fluctuate with the same vigour and volatility as the year before.

Market sentiments reflected the New Year feeling of freshness yesterday, with global equities flexing their muscles. London’s benchmark FTSE 100 index made gains of over 2.0% on the day with European indices and US equities following suit.

UK Economic data released yesterday showed an improvement in Purchasing Manager Index (PMI). Manufacturing (PMI) grew from 47.7 in November to 49.6 in December, falling just shy of the crucial 50.0 mark that separates contraction from expansion. This Manufacturing growth is encouraging, and coupled with today’s announcement that Construction PMI has grown from 52.3 in November to 53.2 in December, it offers a glimmer of hope that the UK may not slip back into recession.

However a net lending slash of £1.2 billion to £0.6 billion from October to November and a further reduction of 0.6% in the M4 Money Supply report keep the economic optimism in check.
Europe and the US also benefitted from some mildly positive releases yesterday with German unemployment falling by 6.8% to its lowest level since 1991 and US ISM Manufacturing growing to 53.9.

The global economy is showing signs of improvement and as a result risk appetite is growing; yesterday the safe haven US Dollar lost out by around a percentage point against most of its major rivals. The Pound to Dollar rate improved from 1.550 in the morning to daily highs of 1.570 before settling at 1.560, and it has continued to fluctuate around that figure throughout today.

Risk appetite also affects the commodity-correlated currencies of the Aussie Dollar and the New Zealand Dollar; both made gains against the Pound yesterday with the Australian Dollar pushing towards the key 1.500 level and the New Zealand Dollar flittering in the high 1.97′s before consolidating at 1.980 today.

Considering the compilation of complications that face the Eurozone it is possible that safe-haven flows could continue across the English Channel towards the Pound and cause the rate to grow further, but as we stand GBP/EUR is still fluctuating daily around the 1.200 mark.

by Tom Trevorrow

With a new year brings fresh optimism and of course fresh problems for financial markets which have started the new year with a slightly defensive tone. Euro zone sovereign debt risks remains the dominant theme for currency markets as trading gets underway for 2012 with aggressive selling against the Euro already witnessed in early morning trade.

Sterling hovers close to a year high against the Euro as improved risk sentiment prompted some investors to close bets on more losses for the pound ahead of data on UK manufacturing. There is still an underlying bias towards short selling the euro with the Pound consolidating around 0.8368 with a high of 0.8333 (1.20).

The pound gained around 2.5 percent versus the euro over 2011 and has risen from above 86 pence per euro in early December, gaining as investors sought alternatives to an under-pressure single currency. Although most safe heaven currencies normally include the USD / CHF and JPY, at times Sterling is also sought as an alternative. Many are skeptical that sterling can be considered a safe haven asset, however, given the fragility of the UK economy and its debt levels, which are still high despite government austerity measures aimed at reducing the country’s deficit.

Europe’s sovereign debt risk concerns will continue to dominate the headlines, with heavy first quarter borrowing to refinance maturing debt expected to push the euro lower and undermine demand for the region’s lower-rated sovereign debt. Therefore any buyers should look to take advantage of the highs and sellers should remain cautious of further aggressive selling – STOP loss orders are a good way to minimize losses for sellers and Limit orders are an excellent way for buyers to take advantage of any early morning movement or overnight activity.

Looking elsewhere across the financial markets , a surprise lift in Manufacturing and a unexpected drop in German unemployment headlines the economic calendar which has helped lift global stocks in early morning trade. German unemployment fell more than expected in December, by 22,000 from the previous month to a seasonally adjusted 2.888 million, with the jobless rate edging down to 6.8 percent from 6.9 percent in November – a new record low since figures began.

The euro rose about 0.8 percent against the dollar to around $1.3058, but stayed within its 3 week moving average with support at $1.2858, which is still a clear target point for speculative positions. Other movement to take note of in early morning trade is that of the higher yielding currencies (AUD / NZD) – The Australian dollar making a positive start to 2012, posting a record high against the euro and touching a one-month peak against the US dollar as positive manufacturing data from China boosted investor sentiment. The Australian dollar broke through 102 US cents against the USD, as market players enjoyed positive Chinese figures from the weekend. This level is seen as a significant support level for the AUD/USD and therefore this may open up the way for further buying in favour of the AUD through intraday trade.

Sterling also trades down against the higher yielding AUD and NZD, with 1.5080 (support ) currently being tested – down 0.57% on the day. The GBP/NZD has also seen some heavy selling, with a break of the key 2.00 psychological level against the NZD – down to 1.9774 (low) -0.61% on the day.

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

The Pound maintained a strong finish to the year against the Euro, rising through major resistance at 1.20 and recording a fresh 11-month high before consolidating below the level by the close of trading. The UK currency also pushed to a high above 1.5750 against the U.S Dollar, equaling the highs of this month. However, a rapid recovery in the Dollar saw the Pound retreat back below 1.57, as swings in risk sentiment continue to dominate market movement.

The Pound remained largely unchanged following the Bank of England minutes, which showed that officials voted unanimously to keep bond purchases on hold. Policy makers also said that the current pace of quantitative easing is close to the market’s capacity and some signaled that further stimulus measures may be required next year to protect the economy from the sovereign debt crisis in Europe.

The Monetary Policy Committee, led by the governor Mervyn King, voted unanimously to keep bond purchases at £275 billion, after increasing the facility by £75 billion in October. The committee also voted 9-0 in favour of keeping interest rates unchanged at a record low of 0.5%, especially with inflation naturally receding over the past two months.

A report earlier this week showed that UK consumer confidence plummeted to the lowest level in almost three years this month, as unemployment rose and hampered household spending. Officials are concerned that the Euro-zone debt crisis will hurt the UK economic outlook, as the government refuses to compromise on the pace of its deficit reduction plan.

Indeed, if the government did reduce spending cuts then ratings agencies would probably slash the UK top rated credit rating. Moody’s have already warned that sluggish growth in the UK may result in a downgrade next year. A separate report yesterday showed that the UK budget deficit narrowed by more-than-expected in November, as tax revenue rose.

Net borrowing fell to 18.1 billion, from £20.4 billion a year earlier. The UK’s Office for Budget Responsibility cuts its growth forecast last month, prompting the Chancellor of the Exchequer George Osborne to borrow more and extend spending cuts to reduce the deficit. The economic recovery has certainly lost momentum in the second half of 2011 and we may see a contraction in growth during the fourth quarter.

Euro / US Dollar exchange rates

The Dollar traded close to its strongest level in 11 months against the Euro before the European Central Bank President Mario Draghi is due to speak today, amid concern that policy makers are struggling to contain the debt crisis. The Euro continued to decline yesterday, as France and Italy prepare to sell debt next week, amid further speculation that France will suffer a downgrade in their credit rating.

There were reports yesterday that the ECB allocated a larger-than-expected €489 billion in funds at the first three-year tender with over 500 banks bidding at 1%. The huge allocation increased speculation that there would be an easing of the debt crisis and that helped limit the Euro’s decline. There was, however, some disappointment over the bond-market reaction, as Italian yields actually increased on the day.

Markets are still doubtful whether the Euro-zone debt crisis could be eased and there was also increased speculation that the medium-term implications of any crisis resolution would be a weaker Euro. The U.S housing data was mixed but markets remain slightly more optimistic about the U.S economy, which helped maintain some yield support for the Dollar.

Today’s Exchange Rate Data

U.K 09:30 Current Account (Q3)

U.K 09:30 Final GDP (Q3)

U.S 13:30 Final GDP (Q3)

U.S 13:30 Initial Jobless Claims (w/e 17th December)

U.S 15:00 Leading Indicators (November)

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

The Pound pushed sharply higher against the U.S Dollar yesterday with a peak around 1.57, as the U.S currency lost ground on the revival in risk appetite, which increased demand for the higher-yielding assets. The latest consumer confidence reading remained close to the record lows with a December reading of -33.

Confidence fell this month to the lowest level since the depths of the 2009 recession, as pessimism about the UK economy increased, amid continuing turmoil in the Euro-zone. The index dropped to the weakest level since February 2009 and a measure of expectations for the economy over the next year fell 8 points to minus 41, the lowest level since January 2009.

UK consumer confidence is being undermined, as European leaders struggle to find a solution to the region’s debt crisis, while unemployment rises at a faster pace and BoE policy makers warn of a contraction in growth over the coming months. The Deputy governor of the Central Bank Charles Bean said yesterday that officials will “take stock” of their current round of economic stimulus when it ends in February and are ready to increase quantitative easing measures if required.

Policy makers expanded asset purchases by £75 billion to a total of £275 billion in October and the minutes of the December policy meeting released this morning will show whether any members voted to increase stimulus measures this month. Another BoE member Ben Broadbent said in an interview published yesterday that there’s a “material chance of a technical recession.”

There was some positive news yesterday, as a report from the Confederation of British Industry showed a much stronger reading than anticipated, although retailers were very uneasy over January’s outlook. The data injected a further note of uncertainty into debate surrounding the economic outlook and there was also a high degree of uncertainty surrounding the impact of bank restructuring.

There was a further suspicion that lending levels would be damaged and ratings agency Moody’s warned that weaker economic growth, as a result of the European sovereign debt crisis, in the UK may result in a downgrade to the AAA credit rating. The government must also stick to its deficit reduction program over the coming months in order to maintain the top rating.

Euro / US Dollar exchange rates

The Euro rallied for a second consecutive day against the Dollar before the ECB announces the results of its first tranche of unlimited three-year loans, amid suggestions the facility is spurring demand for the nation’s sovereign debt crisis. The single currency rallied to a one-year high against the Dollar, after Spain’s borrowing costs plunged.

The Euro also benefited from reports that the German IFO business confidence index rose significantly in December, the second successive month that it confounded expectations of a decline. The institute was cautious over the outlook, but there was relief that deeper pessimism was avoided.

The Dollar declined against all but two of the 16 most actively traded currencies on reduced demand for the U.S currency as a refuge from the turmoil in the Euro-zone. Asian stock markets rallied on further signs that the U.S economic recovery is being sustained. The latest U.S housing data was better-than-expected with starts rising to the highest level since early 2010.

Today’s Exchange Rate Data

U.K 09:30 BoE Minutes of December 7th/8th Meeting

U.K 09:30 PS Net Borrowing (November)

EU 15:00 Flash Consumer Confidence (December)

U.S 15:00 Existing Home Sales (November)

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

The Pound declined against the U.S Dollar yesterday, falling back towards 1.55, while the UK currency resumed its upward momentum against the Dollar, as concerns surrounding the European debt crisis re-surfaced and improved demand for safe haven assets. In the UK, a report from Rightmove Plc showed that UK home sellers cut asking prices for a second consecutive month, adding to signs that the economy is losing momentum in the fourth quarter.

There is widespread speculation that the UK will slip into contraction at the end of the year and prompt a second recession, as the UK’s exposure to the turmoil in Europe, combined with government spending cuts and higher unemployment weakens consumers’ spending power. The Pound fell for the first time in two trading days against the Dollar, as house prices slumped 2.7% and Rightmove predicted a “challenging” 2012.

The Pound rallied significantly above 1.19 against the Euro at one point, after France had its credit rating outlook lowered by Fitch Ratings agency and there is a high probability that S&P will slash France’s AAA rating next year. It is, however, likely that the systemic crisis engulfing the Euro-zone will impact on the UK economy, particularly considering the manufacturing sector and sluggish demand for UK exports.

The Pound and UK assets on the whole have benefited hugely from the turmoil in Europe in the past couple of months, as investors bought UK bonds as an alternative to assets denominated in Euros. Greece, Ireland and Portugal have so far needed an international bailout, while the debt levels in Italy and Spain have prompted an increase in the EFSF.

Although the Pound may continue to make gains against the Euro over the coming weeks, it seems almost inevitable that the UK currency will slip to its October low around 1.53 against the U.S Dollar. The Pound weakened last week, as reports showed unemployment continued to rise and retail sales fell by more than initial estimates in November, raising the likelihood of further quantitative easing from the Bank of England.

A report from the Nationwide Building Society last night showed that UK consumer confidence rose in November from a record low, as Britons’ expectations for the economy improved in the build up to the holiday period. An index of sentiment increased to 40 from 36 in October, which was the lowest level since the survey began in 2004.

The report was met with a largely muted response because the increase in unemployment to a 17-year high will restrain consumer spending over the coming months and therefore the short-term improvement last month is unlikely to last. Although, inflation is slowing naturally and that may improve consumers’ expectations.

Bank of England policy maker Paul Fisher voiced concerns over the economic and financial outlook yesterday and warned that conditions could be even worse than those seen in 2008. There will be further unease over the UK outlook, especially if there is renewed pressure on lending. A UK rejection of increased funding for the IMF will tend to maintain political stresses.

Euro / US Dollar exchange rates

The Euro traded close to an 11-month low against the U.S Dollar before Spain sells government bills and the release of the German report on business confidence this morning, which is expected to show a broad deterioration last month. The single currency tested near-term support in the region of 1.30 against the U.S currency, amid signs that Europe may have difficulty attracting investment from outside the Euro-zone.

There was a tele-conference of European finance ministers yesterday, as they continued to battle to restore confidence. The amount of political funding to the IMF was cut to €150 billion and there was no evidence of significant progress on policy areas. There was a weaker-than-expected Euro-zone current account figure and further net capital outflows for October.

The ECB President Mario Draghi maintained his stance on bond purchases, reiterating that they were a temporary measure to try and restore confidence. In the U.S, the NAHB housing market index rose for November and maintained a slightly more bullish outlook towards the housing sector. There was, however, further unease surrounding the U.S budget policies, as there was no progress on extending tax breaks beyond the end of the year.

Today’s Exchange Rate Data

GER 09:00 – Ifo Business Climate (December)

U.K 11:00 – CBI Distributive Trades Survey (December)

U.S 13:30 – Housing Starts (November)

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

Following on from last week, the Pound lost some momentum against the Euro exchange rate towards the end of the week, finding support just under the 1.19 level, while the UK currency bounced back above 1.55 against the U.S Dollar, as global risk appetite improved as concerns eased over the European sovereign debt crisis. Spain sold its maximum target at the latest debt auction, while a report in Europe showed that manufacturing and services industries contracted less this month than initial forecasts.

The Euro clawed back above 1.30 versus the U.S Dollar, after weakening to a low of 1.2946 on Wednesday, the lowest level since January 11th. The Euro is enjoying a reprieve but the implications of a systemic debt crisis coupled with the possibility of multiple credit rating downgrades for EU nations means that the recovery may be short-lived.

UK economic data again failed to have a significant market impact but retail sales fell by more than initial estimates for November, as rising unemployment and the looming threat of a recession curtailed household spending. The Pound found support in the region of 1.54 against the U.S Dollar and advanced to highs in the region of 1.5540 on Thursday.

There was a 0.4% decline in UK retail sales, which was marginally worse-than-expected, although it was off-set by an upward revision to October’s figure. Markets remained extremely cautious over the data and the UK economic outlook on the whole, given reports of weak consumer spending trends. There was further evidence of defensive Sterling demand, although there was also some evidence that buying might be fading.

The French ECB governing council member Noyer made a very unhelpful comment that the UK credit rating should be downgraded from the AAA status but it did not appear to have a significant market impact. It did, however, ensure that political tensions between the UK and the Euro-zone remains elevated. The FTSE 100 Index of leading shares climbed 0.6%, which helped to improve risk sentiment.

There are still widespread concerns surrounding the UK economic outlook and the looming threat of a fourth quarter contraction. The Pound will also be susceptible to further quantitative easing by the Bank of England with the current round of asset purchases set to be concluded in February. BoE chief economist Spencer Dale said last week that the economy will probably shrink for one quarter at least.

The Pound remained largely unchanged against the Euro for a second day on Friday, while the UK currency edged marginally higher versus the U.S Dollar, as stocks rallied worldwide, recovering from the earlier downturn. The Euro also made gains versus the U.S Dollar, after Jean-Claude Juncker said that Europe should meet a deadline for arranging loans with the IMF, as part of the package to fight the sovereign debt crisis and bring stability to the market.

The Italian Prime Minister Mario Monti also survived a vote on his budget plan and the Euro gained ground on a bit of optimism that officials are pro-actively dealing with the crisis after the disappointment of the EU summit. The Dollar, alongside the Yen, weakened against currencies linked to growth as stocks rose and reduced demand for safe haven assets.

The latest UK Rightmove house price index recorded a 2.7% decline for December with prices relatively unchanged for the year as a whole. There were some diplomatic attempts to calm the inflammatory rhetoric between France and the UK over issues of credit ratings and economic policy, although underlying tensions persisted.

If the UK can maintain its AAA credit rating at the same time as there are further downgrades within the Euro-zone, there will be scope for further defensive Sterling support even though confidence in the UK economy will remain very fragile. The main focus this week in terms of economic data is Wednesday’s release of the Bank of England minutes and the market will be looking for any insight into the prospect of additional easing next year.

Euro / US Dollar exchange rates

The Euro found support below 1.30 against the Dollar and edged higher through the course of the day on Friday, although the positive move may have been a product of markets consolidating after sharp Euro losses through the course of the week. There was a sense of relief that the services and manufacturing indices didn’t decline further and the Euro also gained against the Dollar on risk appetite.

The data still suggested that the Euro-zone economy is stumbling towards a recession over the coming months. Although there was no announcement on EU credit ratings by Standard & Poor’s, markets remained on high alert, as French officials attempted to downplay the potential impact of any cut in the credit rating.

The ECB President Mario Draghi remained very cautious over the possibility of any additional monetary support by the central bank, but there was further speculation that interest rates would be cut and that the bank would eventually succumb to demand for further stimulus measures to be introduced if the situation deteriorates further.

Moody’s Investors Service downgraded Belgium’s credit rating to AA3 from AA1 and there was also action from Fitch, although it affirmed France’s AAA status. It did, however, lower the outlook to negative. There were also downgrades for five other EU economies and the agency also states that a Euro solution was out of reach, which undermined sentiment.

Today’s Exchange Rate Data

EU 09:00 – Current Account (October)

U.S 15:00 – NAHB House Builders’ Sentiment (December)

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

The Pound lost some momentum against the Euro exchange rate yesterday, finding support just under the 1.19 level, while the UK currency bounced back above 1.55 against the U.S Dollar, as global risk appetite improved as concerns eased over the European sovereign debt crisis. Spain sold its maximum target at the latest debt auction, while a report in Europe showed that manufacturing and services industries contracted less this month that initial forecasts.

The Euro clawed back above 1.30 versus the U.S Dollar, after weakening to a low of 1.2946 on Wednesday, the lowest level since January 11th. The Euro is enjoying a reprieve but the implications of a systemic debt crisis coupled with the possibility of multiple credit rating downgrades for EU nations means that the recovery may be short-lived.

UK economic data again failed to have a significant market impact but retail sales fell by more than initial estimates for November, as rising unemployment and the looming threat of a recession curtailed household spending. The Pound found support in the region of 1.54 against the U.S Dollar and advanced to highs in the region of 1.5540.

There was a 0.4% decline in UK retail sales, which was marginally worse-than-expected, although it was off-set by an upward revision to October’s figure. Markets remained extremely cautious over the data and the UK economic outlook on the whole, given reports of weak consumer spending trends. There was further evidence of defensive Sterling demand, although there was also some evidence that buying might be fading.

The French ECB governing council member Noyer made a very unhelpful comment that the UK credit rating should be downgraded from the AAA status but it did not appear to have a significant market impact. It did, however, ensure that political tensions between the UK and the Euro-zone remains elevated. The FTSE 100 Index of leading shares climbed 0.6% yesterday, which helped to improve risk sentiment.

There are still widespread concerns surrounding the UK economic outlook and the looming threat of a fourth quarter contraction. The Pound will also be susceptible to further quantitative easing by the Bank of England with the current round of asset purchases set to be concluded in February. BoE chief economist Spencer Dale said this week that the economy will probably shrink for one quarter at least.

Euro / US Dollar exchange rates

The Euro exchange rate found support below 1.30 against the Dollar and edged higher through the course of the day, although the positive move may have been a product of markets consolidating after sharp Euro losses through the course of the week. There was a sense of relief that the services and manufacturing indices didn’t decline further and the Euro also gained against the Dollar on risk appetite.

The data still suggested that the Euro-zone economy is stumbling towards a recession over the coming months. Although there was no announcement on EU credit ratings by Standard & Poor’s, markets remained on high alert, as French officials attempted to downplay the potential impact of any cut in the credit rating.

The ECB President Mario Draghi remained very cautious over the possibility of any additional monetary support by the central bank, but there was further speculation that interest rates would be cut and that the bank would eventually succumb to demand for further stimulus measures to be introduced if the situation deteriorates further.

Today’s Exchange Rate Data

U.S 13:30 – Consumer Price Index (November)

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

The Pound rallied to a fresh 9-month high above 1.19 against the Euro yesterday and the UK currency remained higher, after a report in the UK showed that jobless claims rose at a slower pace than previously anticipated in November. Claims for unemployment benefits rose 3,000 in November and a revised 2,500 in October, while the jobless rate rose to the highest level in 17-years to 2.64 million.

The Pound has rallied for a third straight day against the Euro, the longest winning streak in over a month, as concern escalated that the Euro-zone government are not doing what’s necessary to find a resolution to the debt crisis and restore confidence in Euro-denominated assets. The UK currency pushed to the highest level since February 18th against the Euro and made gains against 14 out of the 16 most actively traded currencies.

The Pound continues to benefit from its position outside the Euro-zone as a haven from the turmoil engulfing many EU nations. Earlier this month, ratings agencies Standard & Poor’s put a credit rating review on 15 EU nations with the intention of a possible downgrade. The Pound has continued to decline against the U.S Dollar though and the Japanese Yen, as global risk appetite continues to weaken and increase demand for the safest assets.

The FTSE 100 Index declined again this morning, while the European Stoxx Europe 600 Index of shares lost 1%. The Euro fell below the pivotal support area of 1.30 against the Dollar for the first time in 11-months, after Italian borrowing costs increased at the latest bond auction and Spanish banks’ borrowings rose by the most in a year.

The single currency also plunged to a 10-week low versus the Yen and the Euro is likely to struggle until a workable solution to the debt crisis is found. The EU summit produced the bare minimum as far as the market is concerned and the Euro has been slipping as a result. The Pound was also unable to make any headway against the U.S Dollar in a risk averse market.

Dollar moves dominated during the course of the day as global risk appetite continued to weaken, which meant the higher yielding currencies like the Australian Dollar and South African Rand lost ground. Markets are expecting a weak retail sales reading in the UK this morning and the Pound may come under a bit of pressure if the report suggests that consumer spending is weakening going into the Christmas period.

There was further evidence of safe-haven demand for the UK government bonds, although the latest auction did see a lower than expected bid/cover ratio, which could suggest that demand is fading at current yields. There was also speculation that the Bank of England would sanction further quantitative easing by February, which will curb Sterling buying support.

Euro / US Dollar exchange rates

The Euro briefly traded at 1.3050 against the Dollar and was subjected to renewed selling pressure once the 1.30 technical support level was broken. There were further concerns over last week’s EU summit on political and economic grounds. Several non-EU countries have expressed doubts surrounding the proposed legislative changes with persistent fears that there would be no economic back-up for fiscal commitments.

The Bundesbank president Weidmann again opposed any form of monetary financing by the ECB with a stark warning over the need to maintain central bank independence and avoid quantitative easing. He also stated that there was growing ECB scepticism surrounding the peripheral bond-purchasing program and was also cautious over the prospect of boosting IMF funding.

There was also another warning that Greece would miss it’s deficit reduction target for this year with markets increasingly concerned over a prolonged recession. Swings in risk appetite will continue to be a major driving force in the market and the Euro is likely to remain under pressure until officials launch a major strategy to resolve the debt crisis.

Today’s Exchange Rate Data

EU 08:58 – Markit Flash PMI – Manufacturing (December) – Services / Composite

EU 09:00 – ECB Monthly Bulletin Published

U.K 09:30 – Retail Sales (November)

EU 10:00 – Employment (Q3)

EU 10:00 – Flash HICP (November)

U.K 11:00 – CBI Industrial Orders (December)

U.S 13:30 – Current Account (Q3)

U.S 13:30 – Empire State Index (December)

U.S 13:30 – Initial Jobless Claims (w/e 10th December)

U.S 13:30 – Producer Price Index (November)

U.S 14:00 – TICS Net Capital Flows (October)

U.S 14:15 – Industrial Production (November)

U.S 15:00 – Philly Fed Business Survey (December)

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

The Pound remained in the ascendancy against the Euro yesterday, consolidating on the previous day’s surge to the highest level in 9-months, while the UK currency again struggled to make gains versus the U.S Dollar, as global risk appetite continued to weaken. A report from the UK Office of National Statistics this morning showed that UK inflation slowed for a second consecutive month in November, which indicates that the Bank of England can continue to focus on boosting growth through monetary easing.

Consumer price growth rose 4.8% year-on-year in November, compared to 5% the previous month and officials expect the pace of inflation to drop significantly towards the 2% target next year. The BoE has also expressed concern that the European debt crisis could have a dramatic impact on the UK economy and prompt another recession. The Organisation for Cooperation and Development has already said that the UK economy is shrinking and most economists anticipate a contraction during the fourth quarter.

A drop in inflation would help boost consumer spending and provide a much needed help to the economy. Earlier today, an index of UK house prices rose unexpectedly in November from the lowest level in four months, led by an increase in demand and a fundamental lack of properties on the market. However, although the data will be greeted with an element of optimism, the real driver of the market will be risk sentiment and at present, the Pound is benefiting against the Euro from its position outside the Euro-zone.

The Pound was unable to hold above 1.56 against the U.S Dollar and dipped to lows around 1.5450, although it was dominated by wider Dollar moves, as Sterling continued to challenge fresh 9-month highs against the Euro. Bank of England chief economist Spencer Dale was very cautious in tone when talking about the economic outlook and there will still be expectations of further quantitative easing by February, as inflation continues to fall.

In the short-term, there is likely to be the potential for further defensive inflows in the UK bond market, especially with persisting fears over Euro-zone credit ratings being slashed. Underlying confidence is likely to be fragile given the underlying lack of confidence surrounding UK economic data. The latest claimant count and average weekly earnings are released this morning and both report are expected to showing a further decline in labour market conditions.

Euro / US Dollar exchange rates

The Euro edged higher against the Dollar in early trading yesterday but the move was short-lived and the single currency slumped to a fresh 11-month low just above support at 1.30. There were further doubts surrounding the EU summit last week with fears that little progress had actually been made in finding a resolution to the debt crisis.

The German Chancellor Angela Merkel insisted that there would be no increase in the ESM fund and markets were concerned that there would be no new mechanisms to help support the economy or alleviate the debt burden. The Greek Finance Minister warned that the budget deficit was actually wider-than-expected for the first 11 months of 2011.

In terms of economic data, there was a marginal improvement in the ZEW business confidence index, which maintained some hopes that the German economy would prove resilient. The U.S retail sales data was weaker-than-expected with a headline increase of 0.2% for November. At the latest FOMC meeting, the Fed was slightly more optimistic over the economic outlook, while expressing inflation would settle close to the target.

Today’s Exchange Rate Data

U.K 09:30 – Claimant Count (November) – ILO Unemployment (3 Mths to October)

U.K 09:30 – Average Weekly Earnings (3Mths to October)

EU 10:00 – Industrial Production (October)

U.S 13:30 – Export/Import Prices (November)

Foreign Currency Market Update – GBP / USD Update

Sterling is trading relatively unchanged against the Dollar over the last week, tending toward the lower end of the 1.54 – 1.61 range that has been in place for the last quarter. There’s a lot of talk of volatility and uncertainty in the markets lately, but although the latter is undeniably present in high volumes, the former seems to be somewhat of a red herring. In fact the Sterling / US dollar exchange rate has been trading in an unusually tight range for the last year or more. The difference between 52 week high and low is only 10%, the tightest annual range since Sterling traded above 2 for 1 in 2007. This lack of volatility can be attributed to two factors. Firstly a notable absence of direction for interest rates, with both the Federal Reserve and Bank of England sitting firmly on the fence through 2011. You have to go back to December 2008 for the last change by the Fed’, and March 2009 for the BoE. Secondly, the outlook for the global economy remains sluggish, especially for the Western world. As ecostats tick higher the Dollar sags a cent or two, only to regain the lost ground on the first signs of weakness. This behaviour supports the conclusion that unless and until we see a true breakout in economic terms (either for better or worse) we are unlikely to see any definitive trend in the Sterling / Dollar exchange rate. All we do know is that the Dollar’s fortunes (being a ‘safe haven’ currency) will be inversely linked to economic news flow.

In the short term we are nearing the 18 month lows around 1.53. If Euro zone talks fail and trigger a succession of defaults we can safely say the world economy is heading the wrong way and Dollar strength will pervade. A break below 1.53 would be a good indication of market expectations backing that scenario, so Dollar buyers should be on alert to cover any requirement should this happen.

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

Following on from last week, the Pound remained on the front foot against the Euro exchange rate, ahead of the EU Summit and reports that Britain had rejected the treaty. The decline in risk appetite meant the Pound declined back towards near-term support in the region of 1.5550 versus the U.S Dollar, but the UK currency made widespread gains versus the higher-yielding currencies like the Australian Dollar and the South African Rand.

There was no surprise from the Bank of England, as interest rates were left unchanged at 0.5%, while the quantitative easing plan was also unchanged at £275 billion. As usual with a no policy change, there was no MPC statement and we’ll have to wait for the minutes of the meeting later this month to gauge the voting pattern.

The Pound edged higher following the decision and pushed to highs above 1.5750 against the Dollar before retreating sharply, as risk sentiment declined. The UK currency was undermined by the general flow of funds into the Dollar with lows near 1.56, as it held firm against the Euro. There will be speculation of political isolation surrounding the EU summit and, much more damagingly, there will be fears that the UK economy will be vulnerable to any possibility of a Euro-zone break-up.

Safe haven demand for Sterling will continue to be a key factor and there will be expectations of further defensive inflows, despite fears over the UK economic outlook. The principal feature is likely to be a sustained increase in volatility. The European Central Bank cut interest rates on Thursday, ahead of the EU summit, which could determine if any of the region’s members can keep a top credit rating with Standard & Poor’s.

Although the Bank of England is reluctant to extend quantitative easing measures until the current round of purchases have been completed, King introduced a new sterling liquidity measure this week to help banks weather any further escalation of the sovereign debt crisis. The Pound and the Euro fell against the Dollar, after the ECB President Mario Draghi dampened speculation that the Central Bank would buy more bonds to fight the debt crisis.

Bank of England policy maker Martin Weale said on November 25th that there’s a strong case for further QE in the future and Paul Fisher also conceded that more stimulus may be needed. The National Institute of Economic and Social Research reported that UK economic growth slowed to 0.3% in the three months through November, increasing fears of a recession.

The UK currency swung between gains and losses against the Dollar as risk sentiment remained volatile and a drop in sentiment improved demand for the U.S currency as a haven. The Euro rose from the lowest level in a week against the Dollar on Friday, after the region’s leaders boosted a rescue fund and tightened budget rules to help counter the debt crisis.

Officials added €200 billion to the bailout fund and toughened anti-deficit rules, which resulted in European stocks bouncing back following this morning’s slump. The announcement was largely factored into the market but the Euro found support, as it would have taken something very poor to weaken it even further.

The Canadian Dollar rallied against the majors on Friday, as oil prices rebounded for the first time in three days, after EU leaders agreed on a plan for closer fiscal union and eased concern that the sovereign debt crisis will spread and spiral out of control. U.S futures rose, alongside global stock markets, after leaders holding all night talks in Brussels added €200 billion to the debt crisis fund.

The Australian Dollar declined against the majority of the 16 most actively traded currencies, trading above 1.54 against the Pound, after a report showed that unemployment increased last month, as employers unexpectedly slashed jobs. The Aussie extended its drop as Chinese inflation remained unchanged and the ECB President Mario Draghi dampened speculation that the central bank would expand bond purchases to stem the region’s debt crisis.

Euro / US Dollar exchange rates

The Euro declined against the Dollar on Thursday, as the ECB cut interest rates to 1% and the decision was not unanimous, which suggests divisions are forming within the governing council. There was also a reduction in GDP forecasts and there was a general sense of pessimism surrounding the outlook for the economy over the next quarter.

The central bank also announced that it would introduce new three-year repo operations to provide long-term liquidity to the banking sector. The Euro declined sharply following Draghi’s comments in the ECB press conference, as Italian bond yields spiked higher. In the U.S, the economic data was better-than-expected with a drop in weekly jobless claims to 381,000 in the latest week from 402,000 and this provided a brief boost to risk appetite, albeit shortly.

There were further political tensions in the build up to the EU summit meeting. A draft agreement indicated that any treaty changes would be limited to the 17-nation Euro-zone rather than the 27 EU member countries. Underlying confidence remained fragile on fears that the Summit agreement would not be sufficient to provide relief and the Euro retreated sharply to re-test lows below 1.33.

EU leaders concluded their Summit on Friday, hammering out details of the fiscal compact. There would be a limit of 0.5% of GDP on structural budget deficits and any break of this limit could invoke sanctions. The main focus was political with the UK decision to opt out of the Treaty.

Today’s Exchange Rate Data

U.S 19:00 – Federal Budget (November)

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

The Pound remained on the front foot against the Euro yesterday, ahead of the EU Summit today and reports that Britain had rejected the treaty. The decline in risk appetite meant the Pound declined back towards near-term support in the region of 1.5550 versus the U.S Dollar, but the UK currency made widespread gains versus the higher-yielding currencies like the Australian Dollar and the South African Rand.

There was no surprise for the Bank of England yesterday, as interest rates were left unchanged at 0.5%, while the quantitative easing plan was also unchanged at £275 billion. As usual with a no policy change, there was no MPC statement and we’ll have to wait for the minutes of the meeting later this month to gauge the voting pattern.

The Pound edged higher following the decision and pushed to highs above 1.5750 against the Dollar before retreating sharply, as risk sentiment declined. The UK currency was undermined by the general flow of funds into the Dollar with lows near 1.56, as it held firm against the Euro. There will be speculation of political isolation surrounding the EU summit and, much more damagingly, there will be fears that the UK economy will be vulnerable to any possibility of a Euro-zone break-up.

Safe haven demand for Sterling will continue to be a key factor and there will be expectations of further defensive inflows, despite fears over the UK economic outlook. The principal feature is likely to be a sustained increase in volatility. The European Central Bank cut interest rates yesterday ahead of the EU summit, which could determine if any of the region’s members can keep a top credit rating with Standard & Poor’s.

Although the Bank of England is reluctant to extend quantitative easing measures until the current round of purchases have been completed, King introduced a new sterling liquidity measure this week to help banks weather any further escalation of the sovereign debt crisis. The Pound and the Euro fell against the Dollar, after the ECB President Mario Draghi dampened speculation that the Central Bank would buy more bonds to fight the debt crisis.

Bank of England policy maker Martin Weale said on November 25th that there’s a strong case for further QE in the future and Paul Fisher also conceded that more stimulus may be needed. The National Institute of Economic and Social Research said yesterday that UK economic growth slowed to 0.3% in the three months through November, increasing fears of a recession.

Euro / US Dollar exchange rates

The Euro was under pressure yesterday, as the ECB cut interest rates to 1% and the decision was not unanimous, which suggests divisions are forming within the governing council. There was also a reduction in GDP forecasts and there was a general sense of pessimism surrounding the outlook for the economy over the next quarter.

The central bank also announced that it would introduce new three-year repo operations to provide long-term liquidity to the banking sector. The Euro declined sharply following Draghi’s comments in the ECB press conference yesterday, as Italian bond yields spiked higher. In the U.S, the economic data was better-than-expected with a drop in weekly jobless claims to 381,000 in the latest week from 402,000 and this provided a brief boost to risk appetite, albeit shortly.

There were further political tensions in the build up to the EU summit meeting this evening. A draft agreement indicated that any treaty changes would be limited to the 17-nation Euro-zone rather than the 27 EU member countries. Underlying confidence remained fragile on fears that the Summit agreement would not be sufficient to provide relief and the Euro retreated sharply to re-test lows below 1.33.

Today’s Exchange Rate Data

EU – EU Summit

U.K 09:30 – Producer Price Index (November) – Output

U.K 09:30 – Trade Balance (October)

U.S 13:30 – Trade Balance (October)

U.S 14:55 – Prelim Michigan Sentiment (December)

Foreign Currency Market Update – GBP / EUR Update

Sterling flirted with ten month highs this afternoon as the Euro continues to feel the pressure. The latest blow came as ratings agency S&P warned of a possible downgrade to the EU’s ‘AAA’ rating, on top of downgrades to most of the major banks in the region. S&P cited “deepening political, financial and monetary problems with the Euro zone” in its warning, and said that problems among the 15 nations on alert for a downgrade meant that the EU itself would be placed on ‘Creditwatch’. The only nations not to be put on Creditwatch were Greece, whose rating already reflects likelihood of default, and Cyprus which was already on the watch list.

The European Central Bank cut interest rates by 0.25% to 1% today in an effort to boost the struggling economy. The Bank of England kept rates on hold at their meeting today and also opted against adding more quantitative easing to the £275bn already approved. Most economists expect further QE in the New Year, with some predicting that asset purchases could reach £500bn in 2012 and the scope of purchases could be widened beyond the government securities currently on the menu.

The Euro’s fortunes will closely follow the outcome of a key summit in Brussels being held today and tomorrow. The French and German leaders have both made strong comments in favour of finding a solution to save the Euro zone from unravelling. Angela Merkel urged member states to “put national egotism aside”, and French president Nicolas Sarkozy said it was “our duty” to reach an agreement. Any agreement will be complex, because it may require renegotiation of the EU Treaty and agreement of all 27 states.

Despite the apparently precarious situation in which the single currency finds itself, the Euro has not actually declined very much. This should serve as a warning that the market believes any potential solution may ultimately result in a stronger more investible currency. This logic is easy to follow if you assume the solution may involve weaker countries like Greece and Italy leaving the Euro. Reluctance to severely punish the Euro tells us that the market is not expecting the great unravelling that some commentators (and even finance ministers!) are predicting. Clients with Euro requirements should therefore consider buying now while the rate is touching ten month highs.

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

The Pound remained broadly unchanged against the Euro yesterday, but weakened against the U.S Dollar, as risk appetite deteriorated following the announcement earlier this week that Standard & Poor’s has put 15 European countries on watch for a potential downgrade in their respective credit ratings. European stocks slumped, as did the FTSE 100 Index, while Asian shares also fell, increasing demand for the Dollar and the Yen as a haven.

Risk conditions will remain volatile and the Pound will be susceptible to a further slump against the Dollar if stocks continue to fall. However, the Pound may recover some ground versus the high-yielding currencies like the Australian Dollar and New Zealand Dollar as confidence deteriorates. There were reports that the Bank of England have introduced a new sterling liquidity facility to address potential stock market stresses as the European sovereign debt crisis intensifies and stumbles from one nation to another.

Multiple credit rating downgrades in Europe could potentially strengthen the Pound’s position against the Euro as an alternative safe haven. A report yesterday from the British Retail Consortium showed that UK shop price inflation slowed in November to the lowest level in a year. Retail sales rose 2% from a year earlier, down 2.1% in October.

The Bank of England governor Mervyn King said last month that inflation will slow through 2012, helping to support consumers as the debt crisis in Europe undermines the outlook for the UK economy. There is speculation that the ECB will cut interest rates in Europe on Thursday, but the BoE will probably keep bond purchases on hold this month.

Food prices gained an annual 4% in November, ahead of the Christmas period, down from, 4.2% in October, while inflation remained at 0.8%. KPMG and the Recruitment and Employment Confederation said that an index of hiring of full-time staff fell to 48.2 in November from 49.7 the previous month. King maintains that inflation will fall sharply over the next 12 months.

The Pound encountered strong resistance in the region of 1.5650 against the U.S Dollar and dipped to lows close to 1.5560 before finding a degree of support. The economic data on the whole did not have a significant impact on the market, as the Halifax Bank reported a decline in house prices of 0.9% for November, although the underlying trend was broadly stable.

The Pound has declined against the majority of the 16 most actively traded currencies overnight, falling back towards 1.16 versus the Euro and 1.51 against the Australian Dollar. A report this morning may show that UK manufacturing output contracted in November, while the National Institute for Economic and Social Research will report on GDP growth in the three months to November.

Euro / US Dollar exchange rates

The Euro was trapped within narrow trading ranges during Tuesday with a slightly firmer tone, amid speculation that European leaders will agree to boost the amount of funding available to the region’s most indebted nations at this week’s EU summit. There was a further test of support in the 1.3360 area against the Dollar and rallied higher through the course of the day.

German factory orders rose strongly for October, reversing the decline in the previous month’s data. European leaders continued to debate plans ahead of Friday’s summit meeting and there were suggestions of increased financing but there was still an element of skepticism about the plans, especially given the difficulties in leveraging the EFSF.

There was also further speculation that the ECB would cut rates on Thursday and there will be expectations that the central bank will be willing to engage in more aggressive measures to stimulate growth. Following Standard & Poor’s warning over European credit ratings, there was also a warning that the AAA EFSF rating could also be at risk.

Today’s Exchange Rate Data

U.K 09:30 – Industrial Production (October) – Manufacturing Output

GER 11:00 – Industrial Production (October)

U.K 15:00 – NIESR GDP Estimate (3 Mths to November)

U.S 20:00 – Consumer Credit (October)

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

The Pound rallied from a low just above 1.56 against the Dollar yesterday, rising for the first time in two days, as global risk appetite improved following speculation that European leaders are close to finding a resolution to the sovereign debt crisis. European stocks and global commodity markets rallied, increasing demand for riskier assets and reducing the appeal of the Dollar as a haven.

The UK currency also rose against the Yen but continued to decline against the Australian Dollar and South African Rand, as confidence continued to flow into the market. The Aussie and Kiwi have both weakened significantly in the past month on concerns that the European debt crisis will prompt a global recession, reducing demand for risk.

The Pound also found support domestically, as a UK index of services-sector growth unexpectedly rose in November. The Italian Prime Minister Mario Monti proposed €30 billion of austerity measures over the weekend, while the German Chancellor Angela Merkel will meet French President Nicolas Sarkozy today before the EU summit on December 9th.

The Euro may come under renewed selling pressure in the build up to Thursday’s interest rate announcement with the ECB expected to cut rates by a further 25 basis points. The cautious mood of optimism is very fragile and risk sentiment could deteriorate rapidly on any sign that officials will struggle to find a resolution and prevent a systemic crisis.

The Canadian Dollar continued to rally strongly against the majors and it is thought the Loonie is gaining momentum as a relative safe haven from the Euro-zone debt crisis and ongoing tensions in the U.S over budget deficits and political indecision. The U.S is struggling to manage its $1.3 trillion budget deficit and has already lost its AAA credit rating this year.

Whereas, Canada can use rising commodity prices and spending cuts to reduce its deficit within five years. To that end, the Bank of Canada is expected to lead the interest rate increases next year among the Group of 10 countries. The Pound found support below 1.56 against the Dollar and pushed sharply higher towards the close of trading last night with a peak above 1.57.

A report from the British Retail Consortium last night showed that an index of sales was weaker-than-expected with a 1.6% annual decline, the weakest reading in six months. Credit-rating warnings in the Euro-zone member countries continued to provide important initial Sterling support, but the backing could be short-lived given the risk that the UK AAA rating could come under threat.

Euro / US Dollar exchange rates

The Euro consolidated above 1.34 against the U.S Dollar yesterday and edged higher through the course of the day with a peak above 1.3480, as risk appetite continued to improve. The European economic data was broadly in line with initial expectations with a fifth consecutive decline in the EU Sentix index and there was a small downward revision to the services PMI.

There was, however, a renewed sense of confidence in the market with a significant decline in European bond yields, after the Italian austerity package was approved. The Euro is under pressure this morning though, after ratings agency Standard & Poor’s stated that there were important risks to European sovereign credit ratings, especially France.

There were also expectations that the ECB would adopt a more dovish tone at Thursday’s press conference and speculation of 25 basis cut in European interest rates. In the U.S, the ISM services sector index was weaker-than-expected with a decline to 52 in November, from 52.9 previously. Orders gained marginally for the month, but there was an unexpected drop in the employment index.

Today’s Exchange Rate Data

U.K 00:01 – BRC Retail Sales (November)

EU 10:00 – Revised GDP (Q3)

GER 11:00 – Industrial Orders (October)

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

Following on from last week, the Pound continued to decline against the high-yielding currencies, falling back towards 1.52 against the Australian Dollar and slipping under 13.00 versus the South African Rand. Sterling moves continue to be dominated by international developments, after news broke on Wednesday of a coordinated action between major central banks around the world to improve liquidity.

The Pound pushed to a high above 1.5750 against the U.S Dollar as risk appetite improved and stock markets rallied. The UK currency will remain very sensitive to developments within the banking sector and any improvement in financing conditions should provide net support. There will still be a high degree of uncertainty over the economic outlook, especially given the government’s warning over the risk of another credit crunch.

The budget and growth outlook will be watched closely over the coming weeks and there is still a risk of the UK moving to an unsustainable medium-term position in the event of another recession, which would result in multiple credit rating downgrades and further Sterling losses would inevitably follow. UK gilts fell for a second day, amid reports of successful bond auction in Spain and France, which reduced the appeal of the Pound as a haven.

The Pound is likely to benefit from an environment of risk appetite, even as a report on Thursday showed that UK manufacturing contracted in November at the fastest pace since June 2009. The Bank of England governor Mervyn King has urged banks to enhance efforts to bolster their defense against the debt crisis in the Euro-zone, describing it as “systemic.”

The Pound found support on dips towards 1.5650 against the Dollar towards the close of trading on Thursday, but was unable to break higher. The manufacturing data also showed a further decline in orders and the rate of the decline in employment was also the highest for over two years, which maintained fears surrounding the economic outlook.

The Bank of England has been counting on the weaker Pound to bolster UK exports and help drive the economic recovery, as the government continues to embark on its biggest fiscal cuts in a generation. The BoE, Federal Reserve and four other central banks pledged last week to lower the cost of emergency Dollar funding by 50 basis points to improve liquidity.

There will still be unease surrounding the UK banking sector and the impact on lending and that will continue to affect the Pound. It would also be dangerous to believe that Sterling will continue to derive defensive demand from the crisis in the Euro-zone and volatility is liable to increase. Swings in risk sentiment will continue to drive the market in the near-term and the Pound may decline once again against the Dollar if stocks begin to deteriorate.

The Pound maintained a firm tone ahead of the U.S non-farm payrolls data on Friday, but traded back towards 1.56, after the report showed the U.S economy added 120,000 jobs in November, after a revised 100,000 increase the previous month. The main surprise was the unemployment rate which declined to 8.6% for the month, from 9% previously.

In the UK, the PMI index for construction sector declined to 52.3 for November, from 52.9 the previous month, which was broadly in line with market expectations. The services sector data will be watched closely this morning and a weaker-than-expected reading would increase fears of a recession. The Bank of England is due to meet on Thursday and we do not expect any changes in policy before year end but there is an increased likelihood of further quantitative easing in the short-term.

Euro / US Dollar exchange rates

The Euro traded in narrow ranges against the Dollar on Thursday with a phase of consolidation following sharp gains triggered by the central bank moves on Wednesday. There were many political comments ahead of this week’s EU summit, as the French President Sarkozy warned over the efforts required to prevent a break-up of the Euro-zone.

The U.S PMI manufacturing data was stronger-than-expected with an increase of 52.7 for November, from 50.8 previously and there was a significant recovery in both the orders and prices components of the report, which continued to suggest that the economy is making some headway. There were fresh reports that the ECB would provide up to €200 billion in loans to the IMF with the funds then used to support the peripheral Euro-zone economies

There was a sharp decline in bond yields during the day on Friday, as Italian and Spanish markets rallied and this also helped support the Euro. However, the mood of optimism remains fragile as speculation emerged of a Spanish credit rating downgrade, which undermined sentiment. The Italian cabinet approved the latest austerity measures, boosting optimism that a deal could be reached.

Today’s Exchange Rate Data

EU 08:58 – Markit Services PMI (November) – Composite

U.K 09:30 – CIPS Services PMI (November)

EU 09:30 – Sentix Index (December)

EU 10:00 – Retail Sales (October)

U.S 15:00 – Factory Orders (October)

U.S 15:00 – Non-Manufacturing ISM (November)

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

The Pound continued to decline against the high-yielding currencies yesterday, falling back towards 1.52 against the Australian Dollar and slipping under 13.00 versus the South African Rand. Sterling moves continue to be dominated by international developments, after news broke yesterday of a coordinated action between major central banks around the world to improve liquidity.

The Pound pushed to a high above 1.5750 against the U.S Dollar as risk appetite improved and stock markets rallied. The UK currency will remain very sensitive to developments within the banking sector and any improvement in financing conditions should provide net support. There will still be a high degree of uncertainty over the economic outlook, especially given the government’s warning over the risk of another credit crunch.

The budget and growth outlook will be watched closely over the coming weeks and there is still a risk of the UK moving to an unsustainable medium-term position in the event of another recession, which would result in multiple credit rating downgrades. UK gilts fell for a second day, amid reports of successful bond auction in Spain and France, which reduced the appeal of the Pound as a haven.

The Pound is likely to benefit from an environment of risk appetite, even as a report yesterday showed that UK manufacturing contracted in November at the fastest pace since June 2009. The Bank of England governor Mervyn King has urged banks to enhance efforts to bolster their defense against the debt crisis in the Euro-zone, describing it as “systemic.”

The Pound found support on dips towards 1.5650 against the Dollar towards the close of trading last night, but was unable to break higher. The manufacturing data also showed a further decline in orders and the rate of decline in employment was also the highest for over two years, which maintained fears surrounding the economic outlook.

Manufacturers in the UK are feeling the pinch from the sovereign debt crisis in Europe and is jeopardizes the outlook for exports to Europe, as demand weakens and global growth stagnates. China’s manufacturing also contracted last month for the first time since February 2009, as the property market cooled and export demand dropped.

The Bank of England has been counting on the weaker Pound to bolster UK exports and help drive the economic recovery, as the government continues to embark on its biggest fiscal cuts in a generation. The BoE, Federal Reserve and four other central banks pledged this week to lower the cost of emergency Dollar funding by 50 basis points to improve liquidity.

There will still be unease surrounding the UK banking sector and the impact on lending and that will continue to affect the Pound. It would also be dangerous to believe that Sterling will continue to derive defensive demand from the crisis in the Euro-zone and volatility is liable to increase. Swings in risk sentiment will continue to drive the market in the near-term and the Pound may decline once again against the Dollar if stocks begin to deteriorate.

Euro / US Dollar exchange rates

The Euro traded in narrow ranges against the Dollar during the day with a phase of consolidation following sharp gains triggered by the central bank moves on Wednesday. There were many political comments ahead of next week’s EU summit, as the French President Sarkozy warned over the efforts required to prevent a break-up of the Euro-zone.

The U.S PMI manufacturing data was stronger-than-expected with an increase of 52.7 for November, from 50.8 previously and there was a significant recovery in both the orders and prices components of the report, which continued to suggest that the economy is making some headway. This speculation will be confirmed if there is a stronger-than-expected non-farms payrolls report this afternoon.

Today’s Exchange Rate Data

EU 10:00 – Producer Price Index (October)

U.S 13:30 – Non-Farm Payrolls (November) – Unemployment / Average Earnings

Sterling / Euro and US Dollar exchange rates

The Pound rallied against the Euro and US Dollar during trading yesterday, rising up towards 1.1700 on interbank against the Euro and 1.5700 against the US Dollar after a news release confirmed that the U.S Federal Reserve in conjunction with five other central banks agreed to reduce the interest rate on Dollar liquidity swap lines by 50 basis points.

The Bank of Canada, Bank of England, Bank of Japan, the ECB and the Swiss National Bank are all involved in a coordinated action to bring stability to the market.

The purpose of these actions is to attempt to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and help foster economic activity.

European stocks rose for a fourth day with the Stoxx Europe 600 Index up 3%, while U.S futures rallied alongside the FTSE 100 Index. Risk appetite subsequently poured into the foreign exchange market with the Dollar and Yen weakening significantly against the majors. The biggest gains so far are the South African Rand, Australian Dollar and the New Zealand Dollar, as traders dump safe haven assets in favour of higher-yielding currencies.

In Europe, Italian bonds dropped, while the German one-year yield sank below zero for the first time in history. The Pound gained 0.6% against the U.S Dollar but dropped 0.7% versus the Euro, as volatility increased following the announcement.

European shares have slipped during early trade this morning, giving back a little of their strong gains of yesterday – Sterling has also declined just over 0.5% against the Euro and US Dollar.

The market will now be seeking further guidance from policymakers over their plans to help end the region’s debt crisis. French President Nicolas Sarkozy is due to make a key speech today in which he will try to reassure markets, European allies and anxious voters that he is on top of the financial crisis.

Spain’s borrowing costs could potentially leap towards 14-year highs today, as the euro zone enters a critical phase in its two-year debt crisis.

Euro / US Dollar exchange rates

The Dollar seems to be under pressure once again with risk appetite returning to the markets. After trading below $1.3300 yesterday morning, the Euro jumped to hit a high around $1.3530 during trading yesterday afternoon.

European shares have slipped during early trade this morning, giving back a little of yesterday’s gains with the EUR/USD market opening just underneath $1.3500

Despite the slight slippage on European Shares, FX markets seem to have steadied after the initial euphoria following the central banks’ decision to reduce the interest rate on Dollar liquidity swap lines by 50 basis points. However despite yesterday’s announcement markets will be waiting on further guidance from policy makers over a credible solution to the debt crisis.

Today’s Exchange Rate Data

FRA 06:30 – ILO Unemployment (Q3)

EU 08:58 – Markit Manuafcturing PMI (November)

UK 09:28 – CIPS Manufacturing PMI (November)

U.S 13:30 – Initial Jobless Claims (w/e 26th November)

U.S 15:00 – Construction Spending (October)

U.S 15:00 – Vehicles (November)

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

The Pound rallied back towards 1.17 against the Euro yesterday, while the UK currency bounced back towards 1.56 versus the U.S Dollar, ahead of the Chancellor’s Autumn budget to Parliament. George Osborne quoted the OBR in saying that the UK won’t suffer another recession but UK economic growth will be slower than previously forecast this year and in 2012, which will force the government to borrow more and increase fiscal spending cuts.

The Chancellor predicts that the economy will expand 0.9% this year, despite previous forecasts of 1.7% in March, and by 0.7% in 2012, less than half what was previously expected. The budget deficit will reach £120 billion in the financial year ending in March 2013 and the government will have little option but to extend cuts, which would increase unemployment and weigh on households’ disposable income.

Osborne also talked about the UK’s vulnerability to the sovereign debt crisis engulfing the Euro-zone, saying that a recession in Europe would create further problems in the UK. The Opposition jumped on the downgrade to growth expectations, saying further cuts would add to unemployment, erode consumer confidence and fail to reduce borrowing. If the UK misses its deficit-reduction targets, then the UK may be susceptible to a cut in the AAA credit rating, which would have major ramifications, including weakening the Pound’s position.

The Pound pushed sharply higher with a break above 1.5505 against the Dollar, which triggered a further advance towards 1.5650. There were also strong gains for the Pound against the Euro with a move above 1.17, despite the generally pessimistic outlook from the Chancellor yesterday and the planned strike action for public services today.

The immediate market impact from Osborne’s announcement was measured, as the adjustments in the economic forecasts were broadly in line with initial estimates. There was, however, a statement from ratings agency Fitch that the revised UK projections involved a significant deterioration and there was a clear warning that the credit rating could come under pressure.

The Pound has reacted well to the revisions in growth and the UK currency strengthened against the Euro, after reports emerged that the ECB had failed to “sterilize” its bond program at least four times previously. This is the first time it has happened since the ECB expanded the bond purchasing program to purchase Italian and Spanish bonds.

In terms of economic data, the Pound also found support from reports that the Nationwide housing market index rose 0.4% in November with the average cost of a home rising to £165,798. Home values increased 1.6% from this time last year, while a separate report showed that mortgage approvals increased more than initial estimates, as record low interest rates helped support the market.

Euro / US Dollar exchange rates

The Euro found support in the region of 1.33 against the U.S Dollar and peaked around 1.3450 by the close of trading last night. There was some temporary relief for the Euro, amid reports of solid buying support at the latest Italian bond auction, even though there was a further rise in yields. Italian government bonds plunged towards a Euro-zone record low, amid concerns that officials are struggling to contain the debt.

Spanish 10-year bonds also fell for the first time in three days, after Euro-zone finance ministers said more work is needed to enhance the role of the IMF in fighting the debt crisis. German bonds rallied for the first time in six days, after Standard & Poor’s cut the ratings of lenders including Bank of America Corp, Goldman Sachs Group Inc and JP Morgan Chase & Co.

The Euro’s mini-rally didn’t last too long as speculation increased that the ECB would effectively move towards quantitative easing, especially as there was further pressure for the bank to increase its Euro-bond purchases to help support the Euro. The speculation over QE triggered renewed selling pressure on the Euro and there was also talk of another interest rate cut.

Today’s Exchange Rate Data

GER 08:55 – Unemployment (October)

EU 10:00 – Flash HICP (November)

EU 10:00 – Unemployment (October)

U.S 13:15 – ADP Employment Report (November)

U.S 14:45 – Chicago PMI (November)

U.S 15:00 – Pending Home Sales (October)

U.S 19:00 – Federal Reserve Beige Book

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

The Pound weakened marginally against the Euro exchange rate yesterday, as data showed UK house prices dropped last month and the British Chambers of Commerce cut its economic growth forecasts. The Pound also declined significantly against the higher-yielding currencies, as Asian stocks rallied back following a dismal performance last week.

The UK currency edged to a high close to 1.56 against the Dollar, which primarily reflected wider U.S losses across the board. The data in the UK was disappointing again, as a separate report from the Confederation of British Industry showed that retail sales slumped to the lowest level since first quarter of 2009 this month.

Retailers are downbeat on the economic outlook, reinforcing fears that consumer spending will continue to deteriorate even through the Christmas period, compared to previous results. The Bank of England governor Mervyn King stated that the UK was increasingly threatened by the Euro-zone debt crisis and the comments from bank officials also suggested further quantitative easing is very likely in the first quarter of 2012.

The BCC said yesterday that GDP will increase 0.9% this year, 0.8% in 2012 and 1.8% in 2013, compared with previous estimates of 1.1%, 2.1% and 2.5%. The group also added that the risk of another recession “cannot be shrugged off” and predicted the Bank of England will add to its bond purchasing plan early next year to support the economy.

The UK government will announce plans for additional infrastructure spending in today’s Autumn statement, while economic growth forecasts will inevitably be downgraded. The extent of support for UK bonds and discussion surrounding the AAA credit rating will continue to be an important influence on the Pound and there was a retreat back towards 1.55 against the Dollar early this morning.

The Chancellor of the Exchequer George Osborne will present updated economic and fiscal forecasts today and there is increased speculation that government growth estimates will be slashed and budget shortfalls will be greater than previously anticipated. The Bank of England said last week that the threat of the Euro-zone debt crisis on the UK economy has increased.

Another report on the UK housing market this morning showed that prices rose for a third straight month in November, according to the Nationwide Building Society. The average cost of a home rose 0.4% from October, but the accompanying statement suggested that property values will “remain soft” and may decline again over the next 12-months.

The Australian Dollar and South African Rand bounced back yesterday following a modest improvement in risk appetite, but trading conditions remain volatile and both currencies have weakened this morning, as European stocks declined, halting a two day gain, before EU finance ministers convene to discuss insuring a portion of bond issued to debt-ridden nations.

Euro / US Dollar exchange rates

The Euro maintained a generally firm tone on Monday, amid speculation of an IMF backed loan package for Italy. There were also reports that Germany and France would move to issue elite bonds among the AAA nations and accelerate fiscal integration. Both the IMF and the German government denied that talks had even taken place.

Money supply into the Euro-zone was weaker-than-expected and underlying stresses within the banking sector remained extremely high. The latest Euro-zone bond auctions were marginally better-than-expected, which served to ease market tensions to a degree. Confidence will remain fragile and today may bring a bigger test to investor sentiment.

The Euro pushed to highs close to 1.34 against the Dollar before weakening again in the U.S session, as risk sentiment deteriorated once more. There was a warning from ratings agency Moody’s over the probability of a downgrading within the next few days. The Eurogroup meeting today will be watched closely, while the U.S consumer confidence report will also take on added significance.

Today’s Exchange Rate Data

EU – EU Finance Minister / Eurogroup Meetings

U.K 07:00 – Nationwide House Prices (November)

U.K 09:30 – Mortgage Approvals (October)

EU 10:00 – EC Economic Sentiment (November) – Industrial / Services / Consumer

U.K 12:30 – Chancellor’s Autumn Statement

U.S 14:00 – Case Shiller House Prices (September)

U.S 15:00 – Consumer Confidence (November)

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

The Pound remained largely unchanged against the Euro yesterday, while the UK currency traded close to the lowest level in seven-weeks versus the U.S Dollar, as Bank of England policy maker David Miles said the European debt crisis is posing a greater risk to the outlook of the UK economy. He also conceded that a return to “normal” levels of growth may take some time and forecasts of a gradual improvement over the next two years may prove to be optimistic.

The Bank of England has recently embarked on further quantitative easing measures to bolster the economy and improve lending conditions, as government cuts, rising unemployment and subdued consumer spending slows growth. The revised estimate of UK gross domestic product in the third quarter confirmed that the economy expanded 0.5% in the three months to September but it is widely anticipated that the economy slumped into contraction territory during the fourth quarter.

The Euro remains under pressure against the U.S Dollar, amid signs that the debt crisis is starting to affect Germany, after bids at a sale of securities repayable in January 2022 fell 35% short of the €6 billion on offer. The level of uncertainty in the market was echoed by Miles comment that “it’s pretty difficult to know where we’ll be even at the end of the week, let alone where we’ll be in three to six months time.”

The Pound dropped to a fresh seven week low against the Dollar overnight, as Asian stocks slumped and spurred demand for the U.S currency as a haven. The Pound has declined for five straight days against the Dollar and is poised to record its biggest weekly decline since September. The UK currency has also lost 0.4% versus the Euro this week, the first decline in a month.

Although the revised estimate of gross domestic product in the third quarter was unchanged, the figure relied heavily on a build-up of inventories, which increased fears there would be weaker data in the fourth quarter. The latest CBI Industrial survey was also weaker-than-expected with a figure of -19, from -18 previously as export orders fell sharply.

Euro / US Dollar exchange rates

The Euro gained a degree of support yesterday from the German IFO business confidence survey, which recorded a rise to 106.6 for November, contrary to expectations of a further monthly decline. There was also some reassuring commentary, although sentiment remained very fragile, as fears over a deflationary spiral increased.

The Euro was, however, unable to gain any momentum and sold off sharply through the course of the day, as wider Euro-zone tensions quickly came into focus. Equity markets declined as underlying confidence continued to deteriorate with peripheral bond yields rising again and there was also a sharp rise in Belgian yields.

There was also increased fears surrounding the banking sector, amid speculation over a further tightening in liquidity. Portugal’s credit rating was cut again by Fitch ratings, while the IMF said it would return to Greece on December 12th to negotiate a second rescue package. There was little U.S influence yesterday given the Thanksgiving market holiday and the Euro dipped to lows in the region of 1.33 by the close of trading last night.

Today’s Exchange Rate Data

FRA – 07:45 Consumer Confidence

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

The Pound slumped to a fresh six-week low against the U.S Dollar, after the Bank of England minutes from the November policy meeting showed that some officials within the MPC said that an increase in stimulus measures may be needed to quell the exposure to the European sovereign debt crisis. The UK currency also dropped to a six week low versus the Yen, as the MPC voted unanimously to keep quantitative easing capped at £275 billion.

The current purchases are set to end in February and the Pound is under pressure, amid speculation that policy makers will extend the plan as early as next month, as the economic outlook continues to worsen. The dovish tone of the minutes meant the Pound continued to decline against the lower-yielding currencies but the overall level of uncertainty in the market means the UK currency continued to gain against the Australian Dollar and South African – as riskier assets declined in a volatile market.

The Pound also made gains versus the Euro, bouncing back above the 1.16 level, as bond yields in Europe continue to remain at elevated levels. The single currency fell to a six week low against the Dollar, as reports added to concerns that Europe will struggle to find a resolution to the debt crisis. There were reports yesterday that Japanese funds were switching into UK gilts from Euro-zone bonds, which helped underpin support for the Pound against the Euro.

Although some members of the MPC concede that further quantitative easing will probably be required, the panel agreed that there is little point extending the asset purchasing plan until the current run of purchases end in February. The Pound gained support from suggestions that policy makers won’t make a move in December and this offset the decline in risk appetite.

UK stocks declined for an eighth consecutive day, the longest stretch of losses since 2003, which gives you some indication of pessimistic outlook for the global economy. Euro-zone borrowing costs rose again yesterday, after a German bond auction fueled concern that the region’s debt crisis is worsening. RBS Plc and Barclays PLC both lost over 3% in share value on the day, as costs to insure government debt in Europe rose to a record level.

Asian stocks declined earlier in the day, after a report showed Chinese manufacturing may contract this quarter, which saw Rio Tinto shares plunge 2.3% on the day. The benchmark FTSE 100 Index lost 1.3%, extending the loss in November to 7.3%. The Pound is still benefiting from its position outside the Euro-zone as a relative safe haven from the turmoil engulfing the peripheral economies in the Euro-zone and the UK currency may continue to derive support in the near-term.

Bank of England policy maker David Miles conceded there is a strong risk a country may leave the Euro-zone over the coming months and that the threat of the region’s debt crisis has added to the uncertainty surrounding the outlook for the UK economy. The revised GDP data for the third quarter will be released this morning and if growth is revised lower the Pound will come under selling pressure.

Euro / US Dollar exchange rates

The Euro was subjected to fresh selling pressure against the Dollar yesterday, trading down towards 1.33 and the lowest level in six weeks following a much weaker-than-expected German bond auction. The Bundesbank was forced to bid for its own paper as investor demand was very weak. The failed auction increased contagion fears that the debt crisis was spreading to Europe’s largest economy.

There was also a warning from the Greek central bank that Greece was facing its last chance to stay in the Euro-zone and that there was a growing threat of civil unrest could spiral out of control. Ratings agency Fitch warned that France’s credit rating could be under threat if there were further shocks for the economy.

In terms of economic data, there was also a sharp decline in Euro-zone industrial orders, which compounded fears of a recession, especially after the PMI manufacturing index weakened to a two year low. Financial market stresses will continue to dominate sentiment and the increase in risk aversion has helped support the Dollar.

Today’s Exchange Rate Data

U.S – Thanksgiving Day Market Holiday

GER 09:00 – Ifo Business Climate (November)

U.K 09:30 – Revised GDP (Q3)

U.K 11:00 – CBI Industrial Orders (November)

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

The Pound remained on the defensive yesterday and slumped to near six week lows against the Dollar, finding support in the region of 1.56 before correcting slightly higher through the course of the day. The UK currency also lost over 1% in value against the Euro, trading down towards 1.1574, amid a lack of confidence in the UK economic outlook and reports that the Euro was oversold as a measure of stability returned to the market.

The lack of confidence in the UK economy has been compounded by recent economic reports on declining business confidence and weak retails sales leading into the Christmas period. The Pound has benefited from its position outside the Euro-zone and has gained against the Euro as a haven from the sovereign debt crisis.

However, there are concerns that capital flows may fade at current yield levels, especially given the medium term fears over the UK outlook. The Pound is also more vulnerable to swings in risk sentiment and with equity markets under intense pressure, the U.S Dollar is gaining as a lower-risk asset. The Pound also came under renewed selling pressure, after a report from Rightmove Plc showed that UK house prices declined by the most in a year.

The higher-risk currencies like the Australian Dollar and South African Rand continued to weaken yesterday on a decline in risk sentiment, a theme that is likely to continue in the near-term until a level of stability and confidence returns to the market. The flight to safety that we are seeing was further emphasized by reports that a U.S congressional committee failed to agree on a deficit reduction plan, which will probably result in another downgrade in the U.S credit rating.

The European debt crisis is still having a significant impact on the Australian Dollar and there are concerns this morning that France may be about to lose its AAA credit rating. The extra yield demanded to lend to France for 10 years was 155 basis points more than the German rate this morning and the gap has been 200 points already this month, the widest spread since 1990.

The Pound continued to decline against the Euro yesterday, falling to fresh lows in the region of 1.1550 against the Euro, amid speculation that the Bank of England minutes this morning will show policy makers are leaning towards further monetary stimulus to support the economy. BoE policy maker David Miles said this week that the economic recovery has faltered and growth is now “close to zero.”

The Pound reached another six week low against the U.S Dollar, breaking through near-term support in the region of 1.56. Tomorrow’s minutes are from the November 10th meeting where the MPC held the ceiling for quantitative easing at £275 billion, after expanding it by £75 billion in October.

The BoE said the current purchases will take another three months to complete, meaning that further stimulus measures are likely to be introduced before February and possibly as early as next month. The latest government borrowing data was marginally better-than-expected, which had little impact in restoring confidence and markets remain very uneasy over the growth outlook in the UK.

Euro / US Dollar exchange rates

The Euro slumped against the Dollar for the sixth time in eight days before data today may show that Europe’s sovereign debt crisis is having a significant impact on economic growth. The single currency also declined against the Yen ahead of reports forecast to show that manufacturing in Germany and France weakened this month.

The Dollar advanced against the vast majority of the 16 most actively traded currencies, as Asian stocks plunged again over-night, adding to the overall pessimism towards risk. The Australian Dollar declined again, after a preliminary reading of a Chinese industrial output gauge declined. The move was probably exacerbated by the level of tension in the market, as traders flock to the security of lower-yielding currencies.

In Europe, there was further opposition to Eurobonds and the concept of increased ECB bond purchasing by the German government and key members of the ECB, which maintained fears that deadlock would persist, as Spanish bond yields moved higher during the day. In the U.S, the third quarter GDP revision was whether-than-expected with a decline to 2% from the 2.5% original estimate and this had a further negative impact on risk appetite, boosting the appeal of the Dollar.

Today’s Exchange Rate Data

EU 08:58 – Flash PMI – Manufacturing (November) – Services – Composite

U.K 09:30 – BoE Monetary Policy Committee Meeting Minutes

EU 10:00 – Industrial Orders (September)

U.S 13:30 – Personal Income (October) – Consumption – Core PCE

U.S 13:30 – Durable Goods (October)

U.S 13:30 – Initial Jobless Claims (w/e 19th November)

U.S 14:55 – Michigan Sentiment (November Final)

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

The Pound slumped to the lowest level in a month against the U.S Dollar, while the UK currency also lost over 1% versus the Euro, after a report from Rightmove Plc showed that UK house prices declined by the most in a year. Home sellers slashed asking prices amid increasing concern that the UK economic outlook is deteriorating and will result in a contraction in growth during the fourth quarter.

The Prime Minister David Cameron conceded that Britain is “well behind” in terms of growth and reiterated concerns over the UK’s exposure to the European sovereign debt crisis. The FTSE 100 Index dropped for a sixth consecutive day, which is feeding into risk aversion and boosting the appeal of the safest assets like the U.S Dollar and Yen.

The higher-risk currencies like the Australian Dollar and South African Rand continued to weaken on risk sentiment, a theme that is likely to continue in the near-term until a level of stability and confidence returns to the market. The disappointing housing figures have brought the focus back on the weakness of the UK economy today and the Pound is losing value as a result.

The flight to safety that we are seeing was further emphasized by reports that a U.S congressional committee is likely to announce it failed to agree on a deficit reduction plan, which will probably result in another downgrade in the U.S credit rating. The Pound dropped to the lowest level since October 12 versus the Dollar at 1.5610, losing over 1% on the day.

The housing data was very poor and showed that average asking prices in Britain fell 3.1% from October and all 10 regions of the Rightmove report showed falling asking prices, the first time it has happened in over three years that they have all declined at the same time. Cameron was speaking at a CBI event in London and maintained that the government is working on a “massive” credit easing plan.

The Bank of England governor Mervyn King said last week in the quarterly inflation report that the UK economy faces a “markedly” weaker outlook and there is a persistent threat from the Euro-zone. King also said that growth is likely to be “broadly flat” in the first half of 2012 and the MPC is expected to maintain a pessimistic tone in the minutes from this month’s policy meeting.

The Pound remained on the defensive during the course of the day yesterday and dipped to 6-week lows just above 1.56 against the Dollar before correcting slightly higher with Sterling also weakening to 1.1570 versus the Euro. There is a persistent lack of confidence in the UK economic outlook following a raft of negative data on business confidence and report of weakening consumer spending in the build up to Christmas.

The Pound has enjoyed its position outside the Euro-zone and has been the beneficiary of safe haven capital flows over the past few weeks, as confidence drained from the Euro-zone. There were increased concerns that flows may decline at current yield levels, especially given the medium-term fears over the UK economic outlook.

The Pound was also generally more vulnerable when risk aversion increased and this was an important feature during Monday, as equity markets were subjected to heavy selling pressure. A large weighting of mining stocks in the UK FTSE index compounded the impact. The Pound may be susceptible to further selling pressure today with the Bank of England minutes due for release this morning.

Euro / US Dollar exchange rates

The Dollar and the Yen rose against the majority of the majors yesterday, as a flight to safety ensued, amid speculation that U.S officials will fail to agree on a deficit reduction plan, resulting in a second credit rating downgrade for the world’s largest economy. Congress’s budget supercommittee said last night that it had failed to reach an agreement on cutting the deficit.

The Dollar gained on risk aversion, as traders dumped higher-yielding assets in favour of safe haven currencies. The Euro was trading close to the lowest level against the Dollar in six weeks but recovered through the course of the day, amid suggestions that the single currency was looking oversold in the region of 1.34.

The political and economic turmoil in Europe continued, as Spain’s Socialists became the fifth European government to be ejected as a direct result to the region’s debt crisis. The Australian Dollar weakened to the lowest level in six weeks against the Dollar and may weaken further as stocks tumble worldwide and reduce appetite for risk.

Today’s Exchange Rate Data

EU 08:58 – Flash PMI – Manufacturing (November) – Services – Composite

U.K 09:30 – BoE Monetary Policy Committee Meeting Minutes

EU 10:00 – Industrial Orders (September)

U.S 13:30 – Personal Income (October) – Consumption – Core PCE

U.S 13:30 – Durable Goods (October)

U.S 13:30 – Initial Jobless Claims (w/e 19th November)

U.S 14:55 – Michigan Sentiment (November Final)

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

Following on from last week, the Pound strengthened against the Euro and the U.S Dollar on Thursday, following a report from the Office of National Statistics, which showed that UK retail sales unexpectedly rose in October. The increase in sales came despite consumer confidence plunging to record lows in the same month, as government spending cuts and rising unemployment clouded the economic outlook.

Sales rose 0.6% from September, which represents the biggest monthly increase since June, but the pace of spending is unlikely to be sustained at this level, after the drop in UK consumer confidence. Inflation has also outpaced wage growth and the Bank of England has warned that the economy faces a weaker outlook over the coming year.

The Central Bank stepped up bond purchasing last month and there is renewed speculation that the BoE will extend quantitative easing measures as early as next month, as concerns grow about the UK’s exposure to the European sovereign debt crisis. Data released earlier in the week showed that the number of unemployed people rose to 2.62 million in the third quarter, the most since 1994.

The Pound was unable to sustain its advance through 1.5770 versus the U.S Dollar, as the FTSE 100 Index declined for a fourth straight day, increasing the demand for the safest assets. The benchmark FTSE 100 Index lost 1.6% in the day, extending this year’s decline to 8.1%. The Pound continued to make gains against the Euro, as Spain’s borrowing costs surged to a record high at 7%, as the debt crisis spreads from one high deficit nation to the other.

Italian government bonds continued to rise last week, amid speculation that the European Central Bank was said to be buying securities and German Chancellor Angela Merkel called for political action to find a resolution to the debt crisis. French bonds rallied after the nation sold almost all of the maximum amount on offer at Thursday’s auction.

The Pound found support in the region of 1.57 against the Dollar and tested resistance just above the 1.58 level, although it was unable to sustain its advance. Bank of England policy maker Martin Weale stated that there was a strong case for further quantitative easing, which will maintain fears that the MPC could act as early as next month.

The banking sector will inevitably be an important focus in the short-term, especially with an increase in financing pressures. There will be fears that the banks will cut back on lending, which will further undermine growth in the UK economy. There will also still be fears of a withdrawal of funds by the European banks, which may increase selling pressure on the Pound.

The Pound rallied strongly against the U.S Dollar on Friday, however, as gains in global stock markets dampened demand for the safe haven currencies. The UK currency rose above 1.58, while the Pound weakened versus the Euro, amid speculation that European leaders are increasing efforts to fight the sovereign debt crisis and restore confidence in European bond markets.

Bonds in Italy and France rose, amid suggestions that the ECB has stepped up purchases this week and the Euro subsequently gained ground versus the Pound and the Dollar. Swings in risk sentiment will continue to be an important focus in the market, but the developments in the Euro-zone will remain the key driver of the market and risk appetite.

The Pound is still gaining defensive support from its position outside the Euro-zone and there will be further support from an intensification of Euro-zone stresses. This support could prove to be extremely fragile, given the UK debt problems and dependence on overseas funding for the banking sector. In this context, sentiment towards the Pound could reverse quickly.

Euro / US Dollar exchange rates

The Euro rallied against the Dollar and the Pound on Friday, as Italian bond yields declined and reduced fears over the European debt crisis worsening. The single currency bounced back, rising from five week lows against the Dollar and the Yen, as the ECB bought more Italian government bonds in an attempt to bring stability to European markets.

The Australian and New Zealand Dollars both fell significantly last week, as risk appetite deteriorated with the former falling below parity with the U.S Dollar for the first time in over a month. The Euro also stood firm despite a weak Spanish bond auction, which pushed yields higher, while French yield spreads over German bunds also rose to fresh record highs.

The new Italian Prime Minister Monti announced a comprehensive reform package for the Italian economy, although measures would only have an impact in the longer term. In the U.S, the weekly jobless claims data was again better-than-expected with a decline to fresh seven month lows, while the Philly Fed Index dropped sharply from the previous month.

The Euro continued to strengthen through the day on Friday, amid media reports that a plan to increase ECB lending to the IMF, which would then allow the IMF to buy peripheral bonds, was gaining momentum. The speculation helped increase optimism that there would be relief for high deficit economies and pushed the Euro higher.

Today’s Exchange Rate Data

EU 09:00 – Current Account (September)

U.S 15:00 – Existing Home Sales (October)

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

The Pound declined against the Dollar to a low of 1.5750 yesterday, while the UK also lost ground versus a basket of currencies, including the Euro, as the Bank of England’s quarterly inflation report was generally pessimistic over the outlook for UK economic growth. The BoE governor Mervyn King said that growth in the first half of 2012 will be subdued, spurring speculation that the Central Bank may add more stimulus in the form of quantitative easing.

A separate report showed that UK unemployment rose in the three months through September, while the jobless rate among young people climbed above 1 million for the first time since records began in 1992. The worsening economic outlook in the UK means the Pound will be vulnerable to a contraction in growth during the fourth quarter and the lingering threat of further quantitative easing over the coming months.

The Pound recovered modestly against the Euro towards midday, as the European Commission President Jose Barroso said that the Euro-zone debt crisis is systemic. Greece, Portugal Italy, Ireland and Spain are struggling to contain their debt, while credit default swaps in France continue to rise and there is speculation that ratings agencies will downgrade France from its AAA status.

Mervyn King also voiced particularly strong concerns surrounding the banking sector and fears surrounding the Euro-zone with the threat of a fresh credit crunch, as lending contracted further, which could easily trigger a recession. The Bank of England downgraded economic growth forecasts for 2012 and said Britain faces a “markedly weaker” outlook for growth, which could be interpreted as a signal for further quantitative easing.

The threat to UK economic growth will remain an important influence on the Pound and although the BoE stopped short of predicting a recession, if the Euro-zone debt crisis intensifies, it becomes an increasingly likely scenario. Yesterday’s inflation report was the first since the BoE extended bond purchases to £275 billion in October when it said the “deterioration in the outlook has made it more likely” that inflation will undershoot the 2% target in the medium term.

Unemployment rose by 129,000 to 2.62 million last month, the biggest increase since 2009, while the jobless rate climbed to the highest level in 15-years at 8.3%. The number of jobless benefits also rose 5,300 to 1.6 million in October. The Pound has appreciated 1.6% in the past month, making it the second best performer among 10 developed nation currencies, as the UK enjoys its safe haven status from the systemic problems in the Euro-zone. However, that will be difficult to sustain in recession conditions.

The Pound may come under further selling pressure, as speculation mounts that the Bank of England may implement additional stimulus measures as early as next month. King displayed real concern over Britain’s exposure to the sovereign debt crisis engulfing the Euro-zone, amid global condemnation that European officials have failed to tame the crisis.

U.S President Barack Obama said yesterday that the turmoil in financial markets will continue until European leaders persuade investors they have a cohesive plan to effectively end the crisis. The current round of bond purchases in the UK is due to end in early February and policy makers may extend the plan in December.

The Pound declined against the majors overnight, as a report from the Nationwide Building Society showed that UK consumer confidence fell to the lowest level on record in October, as Europe’s debt crisis and higher unemployment worsened the outlook for the economy. An index of sentiment dropped 9 points from the previous month to the lowest level since the index began in 2004.

Euro / US Dollar exchange rates

The Dollar declined against the Pound and the Euro yesterday, while the U.S currency also came under pressure versus the majority of 16 most actively traded currencies, amid speculation that the Federal Reserve will need to consider further quantitative easing because the U.S economy isn’t growing fast enough. The Federal Reserve Bank of New York President William Dudley speaks today and his comments will be watched closely.

Dudley said last month that it’s “possible that we could do another round of quantitative easing.” The U.S consumer price index was marginally weaker-than-expected with a headline 0.1% decline in prices, although there was still a 3.5% annual increase. The growth data was better-than-expected as the NAHB housing index rose to the highest level since May 2010, while there was also a bigger gain in industrial production, which supported risk appetite and weakened the Dollar.

The Dollar also traded lower from the highest level in five weeks versus the Euro, before data this afternoon is expected to show that U.S jobless claims rose last week from the lowest in seven months. The Australian Dollar rose last night, as futures markets indicated a U.S stock market gauge will rise, increasing demand for riskier assets.

However, risk appetite deteriorated again in early trading today following Fitch’s warnings over the U.S banking sector and the Euro retreated to lows around 1.3420. In Europe, Spanish yields edged higher again yesterday and there was a further widening of yield spreads between German and French bonds to record levels, as underlying stresses persisted.

Today’s Exchange Rate Data

U.K 09:30 – Retail Sales (October)

U.S 13:30 – Housing Starts (October)

U.S 13:30 – Initial Jobless Claims (w/e 12th November)

U.S 15:00 – Philly Fed Business Survey (November)

Foreign Currency Market Update – GBP / NZD Update

The Kiwi dollar rallied 5% in October as stock markets rebounded sharply from the late summer sell off. As investors waded back into stocks and riskier assets, demand for safe haven currencies waned, while high yielding currencies came back into vogue benefitting the Aussie dollar most which yields 4.5% compared to 2.5% for the Kiwi. Around Halloween investors became increasingly alarmed at the house of horrors represented by the Greek and Italian sovereign debt problems. Regime change in both countries has done little to calm markets, although it should be noted that Italian bond yields have dipped from the 7% level that caused alarm a couple of weeks ago. Investors still demanded 6.29% in a €3bn auction of new bonds yesterday, the highest level since 1997 and a full percent higher than a similar auction just one month ago. Once investors start demanding those sorts of returns, serious questions are asked about the credibility of the issuer. A move above 7% is what triggered the collapse of the Greek bond market, and markets are highly sensitive to the prospect of a possible repeat performance from Italy. This is all pretty scary stuff, and investors are likely to remain skittish, especially with Spanish yields now heading above 6%. Once markets become spooked, fears can quickly escalate into panic, which is never helpful for high yielding currencies like the New Zealand Dollar. In previous years we have seen massive spikes in the Sterling/Kiwi exchange rate, and if the Euro crisis spirals out of control we would likely see another short term move higher.

The Bank of England kept interest rates on hold at 0.5% last week, as well as the volume of quantitative easing. Producer price inflation showed a slight moderation to 5.7% year on year, and this morning’s closely watched retail price index also slipped to 5.4% from 5.5% last month. On the whole this is negative for Sterling as any sign of moderating inflation is likely to keep the Bank of England from raising interest rates. This is especially true when all signs point toward a sluggish economy. One to watch for tomorrow is the BoE’s quarterly inflation report accompanied by a speech from governor Mervyn King at 10:30.

In terms of important Kiwi ecostats the only one last week was a surprisingly strong rise in retail sales of 2.2%.

Foreign Currency Market Update – GBP / USD Update

The US dollar exchange rate spent October on the back foot as stock markets rebounded sharply from the late summer sell off. As investors waded back into stocks and riskier assets, demand for safe haven currencies waned, driving the dollar’s value lower. This was always a move driven by risk appetite rather than any particular desire to hold Sterling. Since the month end this move has appeared to run out of steam and we now see Sterling/Dollar trading back towards 1.58, three cents off the recent highs. There has been a marked increase in volatility over the last two weeks as events in Europe continue to dominate the headlines. Regime change in both Greece and Italy has done little to calm markets if appetite for the Dollar is anything to go by, although it should be noted that Italian bond yields have dipped from the 7% level that caused alarm a couple of weeks ago. Investors still demanded 6.29% in a €3bn auction of new bonds yesterday, the highest level since 1997 and a full percent higher than a similar auction just one month ago. Once investors start demanding those sorts of returns, serious questions are asked about the credibility of the issuer. A move above 7% is what triggered the collapse of the Greek bond market, and markets are highly sensitive to the prospect of a possible repeat performance from Italy.

The Bank of England kept interest rates on hold at 0.5% last week, as well as the volume of quantitative easing. Producer price inflation showed a slight moderation to 5.7% year on year, and this morning’s closely watched retail price index also slipped to 5.4% from 5.5% last month. On the whole this is negative for Sterling as any sign of moderating inflation is likely to keep the Bank of England from raising interest rates. This is especially true when all signs point toward a sluggish economy. In terms of data to watch for this week the main course will be the Bank’s quarterly inflation report accompanied by a speech from governor Mervyn King at 10:30 on Wednesday.

Given the distinct weakening in Sterling’s latest upswing buyers of the Dollar should consider covering at least half of any exposure at current levels.

Foreign Currency Market Update – GBP / AUD Update

The Aussie dollar rose strongly in October as stock markets rebounded sharply from the late summer sell off. As investors waded back into stocks and riskier assets, demand for safe haven currencies waned, while high yielding currencies came back into vogue. Around Halloween investors became increasingly alarmed at the house of horrors represented by the Greek and Italian sovereign debt problems. Regime change in both countries has done little to calm markets, although it should be noted that Italian bond yields have dipped from the 7% level that caused alarm a couple of weeks ago. Investors still demanded 6.29% in a €3bn auction of new bonds yesterday, the highest level since 1997 and a full percent higher than a similar auction just one month ago. Once investors start demanding those sorts of returns, serious questions are asked about the credibility of the issuer. A move above 7% is what triggered the collapse of the Greek bond market, and markets are highly sensitive to the prospect of a possible repeat performance from Italy. This is all pretty scary stuff, and investors are likely to remain skittish, especially with Spanish yields now heading above 6%. Once markets become spooked, fears can quickly escalate into panic, which is never helpful for high yielding currencies like the Aussie dollar. In previous years we have seen massive spikes in the Sterling/Aussie exchange rate, and if the Euro crisis spirals out of control we would likely see another short term move higher.

The Bank of England kept interest rates on hold at 0.5% last week, as well as the volume of quantitative easing. Producer price inflation showed a slight moderation to 5.7% year on year, and this morning’s closely watched retail price index also slipped to 5.4% from 5.5% last month. On the whole this is negative for Sterling as any sign of moderating inflation is likely to keep the Bank of England from raising interest rates. This is especially true when all signs point toward a sluggish economy. In terms of data to watch for this week the main course will be the Bank’s quarterly inflation report accompanied by a speech from governor Mervyn King at 10:30 on Wednesday.

In Australia the trade surplus for September was slightly below expectations, but still showing a positive balance. Unemployment ticked lower to 5.2%. In short, all is well from a fundamental standpoint which continues to justify the long term appreciation of the Aussie dollar.

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

The Pound strengthened against the Euro yesterday, but the UK currency lost further ground versus the U.S Dollar, slipping back under 1.60 in early trading, as risk appetite deteriorated. A report from the Chartered Institute of Personnel and Development said that an index of UK employers’ hiring intentions weakened significantly, as the crisis in the Euro-zone deepened.

The result of the data adds to recent concerns that the European debt crisis and UK government spending cuts are weighing heavily on the labour market. The report comes ahead of the official unemployment figures released later this week, which are expected to show that claims for jobless benefits rose for an eighth straight month in October.

The Bank of England is also due to present new economic and inflation forecasts this week and a further downgrade in growth projections is expected for the coming year. The Euro also declined against the Dollar for the first time in three days, as Italian borrowing costs soared again, fueling concern that the new government will struggle to contain the debt crisis.

The Pound once again benefited from its position outside the Euro-zone as a relative safe haven to the crisis and the UK currency rose significantly above 1.16 by the close of trading last night. The Pound actually gained versus all of the 16 most actively traded currencies, strengthening the most against the Australian Dollar and the Swiss Franc.

There is real concern that the debt crisis engulfing Greece and Italy is spreading to Spain, as 10-year bond yields in the nation rose above 6% yesterday for the first time since the Euro was introduced in 1999. The Pound is being viewed as a safer alternative to the Euro and at this stage appears immune to the debt crisis, despite concerns that the economy will contract in the fourth quarter.

The Pound hit strong resistance at 1.6080 against the Dollar and fell sharply through the course of the day to lows around 1.5880. There are expectations that the Bank of England will again downgrade its economic growth forecasts for the UK economy in tomorrow’s quarterly inflation report. There was also a suspicion that it would be difficult to attract further defensive funds into the UK from the Euro-zone, given that yield differentials have already moved sharply against the UK currency.

A report this morning from the Office of National Statistics is expected to show that UK inflation probably fell from a three year high in October and may slow further over the coming months, as Europe’s debt crisis impacts the economic outlook. Consumer price inflation probably slowed to 5.1% from 5.2% in September and the BoE governor Mervyn King will have to write yet another public letter of explanation to the Chancellor George Osborne.

Euro / US Dollar exchange rates

The Euro came under further selling pressure against the Dollar yesterday, amid concerns that the debt crisis is spreading to other high deficit nations like Spain and Portugal. The Italian government did secure a sold response in the latest bond auction, but there was still a sharp rise in yields compared with the previous sale and concerns that the new government will struggle to contain the crisis.

Even more alarmingly French bond yields also rose through the day, as markets again fretted over the AAA credit rating and the prospect of a cut. The new Greek government stated its determination to stay within the Euro-zone, but markets remained unconvinced, especially with the New Democracy party stating there would be no support for further austerity measures.

Confidence in the Euro-zone will remain fragile with the latest GDP data weaker-than-expected in France and Germany, which further undermined the Euro. There were no major U.S data releases during the day and there was an increase in unease surrounding the budget situation, as officials struggle to agree upon a cohesive strategy to solve the budget deficit.

Today’s Exchange Rate Data

U.K 09:30 – DCLG House Prices (September)

U.K 09:30 – Consumer Price Index (October) – RPI

EU 10:00 – Trade Balance (September)

EU 10:00 – Flash GDP (Q3)

GER 10:00 – ZEW Index (November)

U.S 13:30 – Empire State Index (November)

U.S 13:30 – Producer Price Index (October)

U.S 13:30 – Retail Sales (October)

U.S 15:00 – Business Inventories (September)

by Adam Solomon

Sterling / Euro and US Dollar exchange rates

Following on from last week, the Pound declined against the majors in the build up to the Bank of England interest rate announcement on Thursday, falling back towards 1.1650 versus the Euro, amid speculation that the monetary policy committee would extend bond purchases beyond the current £275 billion. Following the midday announcement, the BoE maintained asset purchases as policy makers look to gauge the capacity for a second round of stimulus to supplement the risk posed by Europe’s escalating sovereign debt crisis.

The nine member MPC led by the governor Mervyn King held the ceiling for quantitative easing at £275 billion. The Bank expanded asset purchases by £75 billion on October and said that current purchases will take another three months to complete and “the scale of the program will be kept under review.” This will lead to speculation of further QE over the coming months, as the UK’s exposure to Europe’s debt crisis makes a fourth quarter contraction all the more likely.

The turmoil engulfing the Euro-zone has spread to Italy, Europe’s third largest economy, further threatening Britain’s already weak economic recovery. The European Commission conceded that there is a risk of a contraction in the UK economy over the next two quarters and the Bank of England may lower growth projections in its quarterly inflation report this week.

The escalating problems in Italy have seen investors already speculating that the next round of quantitative easing will come in February and the Pound is susceptible to losses in this environment. The Bank of England also kept interest rates unchanged at 0.5%, as inflationary pressure continue to recede, and the Pound continued to decline against the Euro following the announcement.

The EC cut its UK economic outlook last week, as export demand weakens and the economy suffers from the impact of government spending cuts. It predicts UK growth of just 0.6% next year and the government maintains that the fiscal squeeze is necessary to protect the economy from the debt crisis in Europe.

The UK currency also lost ground against the U.S Dollar as Asian stocks tumbled over night on Thursday, but the Pound made strong gains versus the higher-yielding currencies like the Australian Dollar as risk appetite deteriorated. The Euro rose against the Dollar following the biggest drop in two years, as Italy raised the full amount it planned at a bill sales, which helped ease concern that the nation is struggling to fund itself and contain its debt.

The Pound found support close to 1.59 against the Dollar and there was a temporary break of this level towards the close of trading on Thursday. Investors will have to wait for the minutes of the Bank of England meeting released later this month to discover whether any policy makers recommended additional easing this month.

There was still some evidence of defensive flows into the Pound as UK bond yields remained at extremely low levels. There will still be some concerns that the banking sector could be withdrawn to help underpin European balance sheets and this could expose the Pound to heavy selling pressure if market sentiment shifts focus to the UK.

The Pound rallied strongly against the Dollar on Friday with a peak close to 1.6070 and there were wider losses for the U.S currency. Underlying confidence in the UK economy will remain weak and the focus will continue to be on the banking sector, especially with the 3-month Sterling Libor rates moving to above the 1% level.

In the UK, October’s consumer prices and retail sales are likely to be the highlights in terms of data releases this week, along with the Bank of England’s quarterly inflation report. The CPI data should confirm that the annual pace of inflation remains significantly above the government’s 2% target, while the sales data is expected to be subdued.

Euro / US Dollar exchange rates

There was an element of stability returning to European money markets on Thursday and the Euro was able to hold steady during the day, as there was a decline in Italian bond yields from a record high above 7%. The longer-term implications and policy responses continue to be debated intensely given that Italian yields still remain at high levels even with a daily decline.

There were further comments from ECB and Bundesbank officials opposing any extension to the ECB bond-purchasing program. It seems the most likely course of action will be a cut in interest rates, after policy makers cut to 1.25% earlier this month. There were, however, further concerns surrounding the Euro-zone economy as the EU commission cut the 2012 growth outlook sharply to 0.5% from 1.8%.

The Greek President announced that a new government would be sworn in on Friday under economist Papademos and there was a commitment to maintaining austerity measures, although confidence will remain fragile. The U.S data was marginally better-than-expected with weekly jobless claims falling to 390,000, while there was a narrower-than-expected trade deficit of $43.1 billion for September.

The Euro found support in the region of 1.36 against the Dollar on Friday and was generally stronger as immediate Italian fears eased. The Senate approved the government’s austerity plan, paving the way for a lower house vote on Saturday and Prime Minister Berlusconi’s formal resignation. There was a further decline in Italian bond yields, which helped ease immediate concerns.

The Euro made a move towards 1.38 against the Dollar, before consolidating in the region of 1.3750, as the dollar index dipped to its lowest level since October. There were still important underlying stresses in the Euro-zone to contend with, as reports emerged that the German government had formulated plans to manage a Greek exit from the Euro-zone.

Today’s Exchange Rate Data

EU 10:00 – Industrial Production (September)

Foreign Currency Market Update – GBP / EUR Update

Sterling has surged by nearly four cents in two weeks as the Euro zone debt crisis continues to deepen. Heads are rolling in scenes befitting a belated Halloween horror. First the Greek prime minister was forced to step down after a bungled call for a referendum on whether to accept another bailout, leaving the country on the verge of economic disaster. After much political wrangling a new prime minister Lucas Papademos has been appointed. He is not a politician but is perhaps a more credible figure to deal with the country’s fiscal position having been vice president of the ECB and governor of the Greek central bank. Italy’s prime minister Silvio Berlusconi is next to go having finally succumbed to market forces. Yields on Italian bonds had reached 7% leading up to his decision to resign, similar levels that triggered the Greek default. If investors are demanding such high returns for new finance it clearly indicates that the market does not trust