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Posted by on July 26th, 2010. Connect with us on .

Foreign Exchange Currency Forecast Analyst

by Adam Solomon

Sterling / Euro and US Dollar

Following on from last week, the Pound rallied by the most in a week against the U.S Dollar, approaching $1.55 by the close of trading on Friday, while the UK currency also traded back towards 1.20 versus the Euro, amid reports from the Office of National Statistics, which showed that UK retail sales rose more than expected in June. Sales rose 0.7% on the month, reducing concern that the economy might suffer a “double-dip” recession, after the biggest public spending cuts in a generation.

Paul Mackel, a director of currency strategy at HSBC Holdings Plc, said that “the retail numbers were very punchy. The European data set has been surprisingly strong and the Pound is riding the coattails.” The UK currency maintained gains against the weak Dollar, after reports showed initial jobless claims rose and existing home sales fell for a second month.

However, the UK recovery may be undermined by events at home and abroad. The deepest spending cuts in the post war era are looming and the sovereign debt crisis that has engulfed much of the Euro-zone may mean that the UK economy is poised to weaken in the second half of the year. That sentiment was echoed in the minutes from the Bank of England’s last policy meeting, released earlier this week.

Policy makers are evidently concerned about the prospects for the economy, as they even considered expanding emergency stimulus measures in June and blocked Andrew Sentance’s sole voice for an increase in UK interest rates. Investors are becoming increasingly concerned that the second quarter figures may just be “as good as it gets” for the economy in 2010, but the Pound has advanced on the robust growth in retail sales.

The Pound continued to gain versus the U.S Dollar, as UK stocks continued to advance following reports in Europe that services and manufacturing growth unexpectedly accelerated in July. The Euro has rallied 8% against the Dollar from the lowest level in four years last month, as investors became more optimistic that the struggling peripheral nations in the Euro-zone will be in a position to finance their own debt, after the ECB embarked on a policy to buy bonds.

Greece, Spain and Portugal have managed to sell €50 billion of debt since May 10th, as the central bank looks to create a near $1 trillion rescue package. The Pound rallied through 1.19 against the Euro on Friday, while the UK currency made significant gains versus the majority of the 16 most actively traded currencies, after a report from the Office of National Statistics showed that the UK economy grew almost twice as much as expected in the second quarter.

Gross domestic product expanded at the fastest pace in four years in the three months to June, rising 1.1%, from 0.3% in the final estimate for the first quarter. The Pound has rallied to a high of $1.5498 against the U.S Dollar, approaching the highest level in three months. The surprising degree of growth in the UK economy can be attributed to the surge in service industries, manufacturing and construction.

Many economists predicted that the second quarter numbers will be “as good as it gets” this year, as the government prepares to introduce tough spending cuts, while the slowdown in the global economy may hurt demand. The focus on Friday was fixed on the release of the European stress test results, as a total of 91 banks were assessed to see whether they would be able to survive further economic downturns and fund their own deficits.

The focus in the UK this week will fall largely on housing and personal lending data. Hometrack, Land Registry and Nationwide are all expected to release data on the UK property market, as prices continue to cool. Meanwhile, UK mortgage approvals should reflect the ongoing tightness of credit conditions, but the Pound may find support, as stocks continue to rally.

Euro / US Dollar

The Euro rallied for the first time in three days against the U.S Dollar on Thursday, after reports in Europe showed that manufacturing and service industries unexpectedly accelerated in July. A composite index based on a survey of purchasing managers increased above initial estimates in June, while a gauge of German manufacturing also rose this month.

The Euro weakened against 12 out of the 16 most actively traded currencies following the results of the European bank stress test on Friday, amid speculation that the standards of the test were too low to ease concerns that the region’s debt crisis will spread. The single currency declined for the first time in two-days against the Dollar, after regulators found seven banks need to raise a combined €3.5 billion of capital.

There was an immediate concern that the stress tests may not have been strict enough. Mike Jones, a currency strategist at Bank of New Zealand, said that “initial reaction has been a disappointment about how far the stress tests went. There are some reasons for people to be more cautious going forward. With the euro, there are doubts the currency can sustain a rally above $1.30. The Euro’s rally is running out of steam.”

The increasing concern over the possibility of a double dip recession in the U.S means that the economic data released this week will come under further scrutiny. Friday’s release of the first estimate of gross domestic product in the second quarter is expected to show growth of 2.5%, a modest slowing from 2.7% in the previous quarter.

Data Released July 26th

U.K 00:01 – Hometrack House Prices (July)

U.S 15:00 – New Home Sales (June)

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