09-03-2009 : FCG Market Report 9th Mar.2009
After remaining fairly steady during February, the pound fell in trading on Monday, dropping below €1.10 for the first time since January, when we approached parity.
The reason for the drop is yet more bad news for the UK economy – the government has bailed out the Lloyds Banking Group - new lending from Lloyds will jump to £28bn in the next two years, dwarfing similar figures from Northern Rock and RBS. This caused a big fall in banking shares, and dragged the Pound down. "What's going on in UK shares at the moment is putting pressure on Sterling," said Geraldine Concagh, an economist at AIB Group Treasury.
Also last week we saw the Bank of England cut interest rates to a new record low, and announce that £75 billion of ‘new money’ will be ‘created’ through Quantitative Easing – this is likely to continue to put further downward pressure on Sterling.
If this wasn’t enough, forecasts from the IMF show the UK economy is set to shrink at a much faster level than the EU economy:
The outlook for economic growth makes grim reading. It shows that according to the IMF, the UK sets to be the worse performing nation amongst world economies, with forecasts showing a 3% decline in GDP.
Due to these weak forecasts for the UK compared to the EU, the Pound is likely to remain weaker than the Euro for some time, and exchange rates for GBPEUR may well continue to drop towards, and possibly below, parity.
Good News
Some good news amid the gloom and doom - a court decision in Spain has opened the way for thousands of UK citizens to reclaim some of the tax they paid when they sold their homes there. The High Court in the region of Valencia has ruled in favour of a British couple, Mr and Mrs Roy.
It told the Spanish tax authorities to repay them for being charged a capital gains tax levied at 35% instead of 15%. A spokesman for the Roys' law firm said it was gathering similar cases, with an average claim worth £14,100.
With the refunds being paid in Euros, and with the Pound so much weaker now than in recent years, its a great time to convert this back to Sterling - if you are one of the lucky expats who are expecting funds to be returned to you, do get in touch with Foremost Currency Group and make sure you achieve the best possible exchange rate.
If you have a requirement to purchase Euros with Sterling however, consider acting sooner rather than later to protect yourself from falling rates. Even if you don’t need your currency for some time, you can lock in today’s exchange rates with only a 10% deposit using a Forward Contract, thereby protecting yourself against any further decline in exchange rates.
Data of note this week:
For the UK we have House Price Data, Industrial and Manufacturing Production and Trade Balance data, all of which may cause volatility in GBPEUR exchange rates. Also watch out for the European Central Bank monthly report, which gives an insight into the EU economic climate.
For more information on how these data releases can affect your currency purchase, contact one of our dedicated Account Executives today.
USD
Last week saw further selling pressure on Sterling as it tested support below the 1.4000 level against the US Dollar. We initially saw significant resistance to crossing the 1.40 barrier, with Cable remaining stagnant just above the key support level. US Non-Farm payroll data showed that unemployment in the USA now stands at 8.1% which briefly undermined the US currency.
Over the weekend, the UK government announced it was increasing its stake in the Lloyds Banking Group to 65% in exchange for insurance on £260bn of toxic debt assets. We saw Sterling take heavy pressure against all currencies following the announcement, and it slipped over 3 points, breaking through the 1.40 barrier with ease on Monday morning.
This week we have very little in terms of data releases from both sides of the Atlantic, with the only data likely to have a significant impact being the monthly Retail Sales figures on Thursday from the USA. he graph below shows how the GBP/USD cross has dropped alarmingly over the past year, and although the UK has now caught up in the interest-rate cycle, it remains to be seen whether this will halt the slide suffered by Sterling over the past few months, with one week in October seeing a 15-point drop.
Speak to your Account Manager to ensure that you make the most of your currency purchases in this volatile market.
AUD
The Australian Dollar was subjected to volatile trading conditions last week, with the GBP/AUD rate trading at highs above 2.25 on Monday and lows below 2.17 on Wednesday. The Australian Dollar gained ground following the Reserve Bank of Australia's decision to leave interest rates unchanged at 3.25%, and a much better than expected export performance in Q4 of 2008. However, these gains were reversed after data revealing GDP unexpectedly fell by 0.5% over the same period, as the economy contracted for the first time in eight years.
The GBP/AUD closed on Friday at 2.1991, down 1.80% from 2.2395 a week earlier, benefiting those converting Australian Dollars into Sterling.
February's employment report on Thursday is potentially the most market sensitive release this week, although global stockmarket performances and commodity price performance are likely to influence Australian Dollar direction.
Key Data Releases This Week
10/03/09
• UK - BRC Retails Sales and RICS House Price Balance
• DE - CPI (Consumer Price Index) and Trade Balance
11/03/09
• UK - Goods Trade Balance
• US - Monthly Budget Statement
• NZ - RBNZ Interest Rate Decision
12/03/09
• SS – SNB Interest Rate Decision
• US – Jobless Claims and Retail Sales
• NZ – Retails Sales
• EU – ECB Report
13/03/09
• US – Trade Balance
• SS – PPI – (Producer Price Index)
In a relatively quiet week for economic data much focus will be placed on the performance of financial institutions around the world, notably we are likely to see some Sterling weakness following the announcement that the government has increased its stake in Lloyds to almost 65%.
Elsewhere those looking to buy either NZD or CHF would be wise to keep a close eye on the Interest Rate decisions out on Wednesday and Thursday respectively. While analysts widely expect a cut from the RBNZ, the outcome of the meeting in Switzerland is far more difficult to predict. Interest Rates in Switzerland currently mirror that of the UK with the base rate sitting at just 0.5% and the outcome of the meeting could give an indication to investors as to the next possible move from the BOE.
Those with a $ or € requirement will be more concerned with data released towards the end of the week with the ECB report on Thursday and the US Trade Balance on Friday likely to provide the most volatility.