Foreign Currency Exchange Rate Forecast – The Pound received a timely boost


by Adam Solomon

Sterling / Euro and US Dollar

The Pound received a timely boost yesterday, rising up towards 1.62 against the U.S Dollar, while the UK currency also made modest gains versus the Euro, after a report from the Office of National Statistics showed that retail sales rose by more-than-expected in April. Sales increased 1.1% from the previous month, despite expectations of a 0.8% increase, following the two bank holidays and improvement in consumer spending through the Royal Wedding.

The Nationwide Building Society reported earlier in the day that consumer confidence had plummeted in the past month and the figures from the ONS may prove to be skewed to the upside. The Pound peaked at 1.1371 versus the Euro before falling through the course of the day and bearish sentiment surrounding the UK currency may see further losses this week.

UK unemployment claims rose in April, while inflation surged to the highest level in two years, squeezing household spending and dampening sentiment. The increase in retail sales was the biggest for the month of April since 2002 and from a year earlier sales increased 2.8%. The Bank of England have kept interest rates at a record low this month, with policy makers concerned that an increase in borrowing costs would potentially weaken consumer spending and curtail the pace of the recovery.

The Pound declined against the Euro exchange rate through the course of the day, as investors treated the unexpected increase in retail sales as a one-off. If consumer spending resumes the negative trend in May the interest rates are likely to remain on hold until the end of the year. According to the sterling overnight interbank average, money markets are now anticipating a rate increase from the Bank of England as late as January.

The Deputy Governor of the Bank of England Charles Bean said yesterday that allowing a temporary period of about target inflation is necessary to support the economic recovery. “The Monetary Policy Committee’s chosen approach has been to accept a temporary period above-target inflation, rather than seeking to hold inflation close to the 2% target as possible at all times.”

Elsewhere yesterday, there was also an encouraging report from the Confederation of British Industry on manufacturing but underlying confidence in the economy will remain weak. Expectations that the rebound in spending is short-term given the downward pressure on real incomes and concerns over the unemployment.

The Pound is likely to continue to lose ground against the resurgent Euro and may extend recent losses against the Dollar to the lowest level since April 1st. A trend line connecting the lows of January 7th and March 28th may have capped the Pound’s upward momentum, while the UK currency also traded below its 20 and 60 day moving averages.

Euro / US Dollar

The Euro exchange rate encountered strong support in the region of 1.4220 against the U.S Dollar yesterday and gained buying support through the course of the day. U.S initial jobless claims were marginally better-than-expected with a decline to 409,000 in the latest week from 438,000 previously. In contrast, the existing home sales data was weaker than initial estimates with a decline to 5.05 million for April.

The US Dollar exchange rate also came under selling pressure, after the Philadelphia Fed index retreated sharply to 3.9 for May from 18.5 and there was a particularly negative reading for new orders. The mixed bag of U.S economic data released yesterday will spur concerns that the economic recovery is losing momentum and the Fed will keep interest rates at ultra low levels.

There are, however, further stresses within the European banking sector, as the ECB made forceful remarks about cutting lending to the Greek banks. The Central Bank remains strongly opposed to any form of restructuring of Greece’s debt and also warned that Greek bonds would not be accepted as collateral. The uncertainty will persist until the IMF releases its interim report on the Greek economy and this could potentially undermine the Euro.

Today’s Data

EU 09:00 – Current Account (March)

EU 15:00 – Flash Consumer Confidence (May)

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