With the global economic recovery at risk of becoming a ‘non-recovery’, governments and central banks worldwide appear to be taking a rather tentative approach to every potential policy alteration. Market movements have been rapid and sensitive to slight deviations in data released throughout the week making it increasingly difficult to call changes. Friday afternoon, whilst the majority of people wind down for the weekend, can often be the most exciting in foreign exchange. Hold tight…
Pound Sterling – UK Markets
Sterling was given a small boost yesterday even though Bank of England Governor Mervyn King stated there would be no increase in the base rate. However, on the flip side to this, he also announced that there would be no need for quantitative easing just yet. With QE the only logical ammunition left in Mervyn’s locker it’s almost as if he is waiting until it is absolutely necessary before implementing it. Inflation remains over twice its official target.
Sterling did strengthen across the board in the immediate aftermath of this announcement. However, overnight we have seen it just retrace those gains against the majority of currencies. The euro though, remains weak and those interested in a GBP/EUR transfer should speak to their broker.
US Dollar – US Markets
US exports hit a record high in July, which has closed the gap on the country’s trade deficit to its lowest level in three months. The canter has been led by strong overseas sales of manufactured goods. US exports as a whole rose 3.8 percent to $178 billion during this period. On the other hand, imports fell 0.2 percent, helped by a fall in the price of oil reducing the cost of US crude oil imports. The news comes as welcome relief to President Obama after the unemployment rate remained at 9,1 percent following Augusts abysmal figures.
However, on the flip side of this, initial jobless claims came in higher than expected yesterday which leads us to suggest that the labour market may be stagnating. A fall to 405,000 had been forecasted by economists. Contrary to this, the number actually rose by 2,000 to 414,000. The Labour Department has defended these figures, stating that they “suffered no discernible impact from the severe storms battering the country”. The US Dollar has continued to strengthen across the board even as the global economic recovery slows to a walking pace.
Euro – European Markets
The European Central Bank painted a dovish picture of the future by putting a stop to their rate hiking cycle yesterday due to “intensified downside risks” to growth. ECB president Jean-Claude Trichet also voiced his fears that the economic recovery is at risk of coming to a halt. He also launched a scathing attack on European governments that he claimed “have not behaved properly” during the crisis and defended the actions of the ECB stating that they delivered price stability to the eurozone.
There was little surprise when Trichet announced that interest rates would remain at 1.5 percent due to the ongoing debt crisis in the eurozone. After being raised by a quarter percent in July, inflation has cooled which also reduced the need to raise rates once more. It now expects expansion of 1.6 percent this year, and 1.3 percent in 2012. Previously it had predicted the economy would grow 1.7 percent in 2011 and 1.9 percent in the next year. The consequences for the euro have seen it fall quite dramatically in the last 24 hours across the board.
Other Currencies – Highlights
The rand is among a number of currencies suffering at present as it headed for its first weekly drop in three against the dollar. This after the US Federal Reserve and ECB indicated growth is slowing, curbing demand for riskier assets.
However, following Obama’s announcement in which he proposed a $447 billion package to spur hiring in the world’s largest economy, the Australian and New Zealand dollars both rose against the majority of their most traded counterparts.
Dollar Weakens as Fed Rate Cut in July Seems Imminent