26-05-2009 : FCG Market Report 26th May 2009
After a bumpy ride over the last week or so, the Euro remained relatively stable against the Pound on Monday’s trading, largely due the UK bank holiday affecting trading volumes.
European Central Bank President Jean-Claude Trichet has confirmed that “measures to ease funding conditions for Banks and Enterprise and encourage them to maintain and expand their lending to clients” are to be announced on June 4th. This is expected to be the beginning of quantities easing measures by the ECB. Investors will be watching upcoming Euro-zone data closely to asses if the economic situation is getting better or worse than expectations. With a raft of Euro data released this week it may prove difficult for the Euro to fight back against the pound, if the results continue to remain weak. Watch out for the German CPI data on Wednesday and the German unemployment statistics on Thursday, followed on Friday by Eurozone CPI and Unemployment figures on Friday.
There is minimal data due out this week for the UK, Wednesday’s UK new mortgage figures and the consumer confidence data on Friday.
In the medium to longer term economists and investors alike will be watching the German economy closely. It is often seen as a barometer for the overall health of the Eurozone economy. With a Gross Domestic Product in excess of 3.66 Trillion Dollars in 2008, just under 20% of the entire European GDP, the German Economy is the largest in Europe and fourth largest in the world. Germany exports almost a third of its domestic product with two thirds of its exports within Europe, this has been declining at the fastest rate since 1950 when the statistic was first recorded. Until this stabilises and German Unemployment figures peak it is difficult to imagine any increase in confidence in the Euro. We may still see some fluctuations in the value of the Euro against the Pound as UK data is released and affects the comparative strength of the UK economy.
USD
Sterling continued to rally last week, despite what looked like a difficult week on paper. CPI Inflation, Bank of England Minutes and UK GDP data were all expected to undermine the British currency at various points throughout the week, however none of these releases had a significant impact on the Pound, which continued to gain strength against the US Dollar, which has weakened significantly due to what appears to be the return of risk appetite among investors.
When rumours of a financial crisis first surfaced back in 2008, many investors liquidated their vulnerable assets such as Gold and carry trade currencies, and moved funds into the safe haven of US Dollars which adds artificial strength to the currency. This has started to fade away as these fund managers are now diversifying their assets back into a broader range of investments, weakening the Dollar.
Looking to the week ahead, we see a relatively light calendar for the GBP/USD cross, with the only data of note being the US GDP, PCE and personal consumption figures on Friday. The GDP reading will show a continued slide in the US economy, as initial predictions show a 5.5% contraction, compared with a previous reading of -6.1% YoY. Looking at the minor data releases, we have US Consumer Confidence figures out on Tuesday likely to provide an insight into predicted consumer spending over the short term.
Monday was a bank holiday on both sides of the Atlantic, thus we saw a very quiet start to the week. The Dollar gained some strength against the Pound in early morning trading on Tuesday, however this was quickly regained as Sterling looked to push back past the 1.60 mark. Whether we will see the breakthrough this week is still a matter of debate among market participants; clients buying US Dollars may wish to keep in touch with their Account Manager to achieve the best possible currency exchange rates.
The graph on the next page shows the movements of GBP/USD across 2009:
AUD
The Australian Dollar was initially supported last week by rising global stockmarkets and higher commodity prices. However, as global stockmarkets retreated sharply on Thursday, the Australian Dollar was unable to hold on to these gains against Sterling. The minutes from the Reserve Bank of Australia's May meeting, at which interest rates were left unchanged at 3%, gave rise to some speculation that it might again leave interest rates at 3% in June if financial market conditions improve.
The GBP/AUD rate closed on Friday at 2.034, up 0.5% from 2.025 a week earlier, benefiting those converting Pounds into Australian Dollars.
Ahead of important economic growth data and the interest rate decision next week, investors will be focusing on construction activity (Wednesday), home sales and business investment (both Thursday) for confirmation that the Australian economy is one of the better positioned economies for recovery.
Key Data Releases This Week
We have already had some data from Germany - GDP figures were as expected however the import price index was quite a bit worse than forecast. As Germany is the biggest economy in the EU, this has weakened the Euro and pushed the rate up slightly.
Other data to watch out for this week is US Consumer Confidence later today, US House Prices and Home Sales tomorrow - if these are poor data sets, this could cause the US Dollar to continue to weaken. On Thursday we have UK Consumer Confidence Data and also for the UK, Friday sees some House Price Index information. For the EU, watch out for CPI and Unemployment data on Friday that will likely affect the value of the Euro, if data supports the case for interest rate cuts in June.
Tuesday
Ger - GDP
Ger - Import Prices
EU - Current Accounts
US - Consumer Confidence
Jap - BoJ Minutes
Wednesday
Ger - Consumer Price Index
US - Home Sales
US - House Price Index
Thursday
Aus - Home Sales
EU - Consumer Confidence
US - Durable Goods
UK - Consumer Confidence
Friday
UK - House Price Index
EU - Consumer Price Index
EU - Unemployment
US - GDP