Foreign Exchange Rate Forecast News – The Pound briefly rallied against the US Dollar exchange rate


by Adam Solomon

Sterling / Euro and US Dollar

The Pound briefly rallied against the US Dollar exchange rate yesterday, rising to a high of 1.6470, as global stocks and commodity rose, after the ECB president Jean-Claude Trichet gave a strong indication that the central bank will support Greek government bond rollovers. The UK currency traded higher against the Dollar for the third day in four, after a report on the UK housing market showed that prices rose 0.1% in May, following the 1.4% decline the previous month.

The overall improvement in risk appetite has curtailed demand for the U.S Dollar but the Pound failed to hang on to the gains, falling back towards 1.64 by midday, as the outlook for the UK economy continues to be clouded with uncertainty. The FTSE 100 Index advanced 0.2% on the day and the Standard Poor’s 500 Index rose 0.5%. The Pound has weakened for six straight days against the Euro, plunging to a low of 1.1159 overnight.

Further speculation that the European Central Bank will raise interest rates again before the Bank of England has continued to hamper sentiment for the Pound. In the UK, there were also concerns of weakening demand, as consumer spending remains under pressure, amid the most aggressive public spending cuts in a generation and rising consumer prices.

The consensus is that the monetary policy committee will not raise interest rates at this week’s meeting. In the widely unlikely event that policy makers to do implement a rate increase, the Pound may still come under pressure, amid concerns that higher borrowing costs would further damage the already fragile economic recovery.

The Pound weakened again against the Euro exchange rate overnight, trading within a penny of its weakest level in a month, after a report from the British Retail Consortium showed that UK shop price-inflation unexpectedly slowed in May. The UK currency subsequently lost ground versus a basket of currencies, as prices charged by retailers rose just 2.3% from a year earlier, the slowest pace in 2011.

Elsewhere, the European Commission said that the government faces a difficult balancing act this year in implementing the deficit-reduction plan, while sustaining economic growth. The EC also said that UK growth forecasts are too optimistic and that will prompt speculation that the economy may stall in the second quarter, even though the full extent of the government’s cuts have yet to be felt.

UK retail sales fell in May, as rising prices and concern about finances curtailed consumer spending. A separate report also showed that unemployment rose in May and the reports combined will add to concerns that service-sector growth is slowing. The Pound is likely to fall back towards 1.10 against the Euro in the build up to the ECB announcement this week, with Trichet expected to indicate a rate increase for July.

Euro / US Dollar

The Euro exchange rate made widespread gains against the majors yesterday, on speculation that officials will contain the sovereign debt crisis and proceed to raise interest rates over the coming month. The single currency reached the highest level in a month versus the U.S Dollar, advancing 0.8% on the day to 1.47. The Dollar was subjected to renewed selling pressure, as global risk appetite improved.

There was a warning from a Chinese economic institute that China should be wary of holding too many dollar-denominated assets, which also triggered initial selling pressure on the Dollar. Although the comments were later removed from the website, overall confidence remained fragile. The Federal Reserve Chairman Ben Bernanke is expected to say that the economy remains in need of boost today and that may prompt further speculation that the Fed will embark on further quantitative easing.

In the Euro-zone, there was renewed optimism that Euro-zone leaders would be able to agree a fresh rescue package for Greece. The Euro was supported by expectations that the ECB would adopt a hawkish rhetoric in the monthly press conference on Thursday and the single currency encountered strong resistance just above 1.47 at the close of trading last night.

Today’s Data

EU 10:00 – GDP Details (Q1)

GER 11:00 – Industrial Production (April)

U.S 19:00 – Federal Reserve Bank publishes Beige Book

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