Market News Detail

GBP currency exchange rates effect of recession

Sterling Overview

In our last report monthly report we mentioned the recession in UK could be "W" rather than "V" shaped, which I know is a little technical but this will effect the value of sterling in the currency exchange markets. For example last week the first release of Q2 GDP was worse than expected coming in at -0.8% compared with expectations of -0.3%. Net result of this, sterling lost close to 2% in value against most major currencies.

In July the Bank of England Monetary Policy Committee (MPC) left interest rates on hold at 0.5% and continued with its policy of quantitative easing (QE). Since they announced an injection of £150bn into money markets a few months ago, the BoE has released £125bn and we expect the final £25bn to be released this Thursday when they announce latest interest rate decision.

Digesting recent data it seems UK companies are repaying debt and consumer borrowing is easing fast. This might explain why commercial bank reserves at central banks are rising, and it is possible that they are not hoarding liquidity but that companies and individuals do not want loans as much as they did. These trends indicate that economic growth will remain low for the short-term and there is no reason why interest rates cannot remain low as well.

As I write this commentary sterling has recovered well since falling immediately after Q2 GDP, although clearly as we have seen on many occasions markets are fragile and it only takes one poor data release for currency exchange rates to move aggressively. With this in mind for a more in-depth analysis please contact a Pure FX Currency Dealer directly.

GBPEUR

Last month we announced the ECB (European Central Bank) would follow UK and US by introducing a QE programme of buying €60bn worth of euro bonds between now and end of 2010. This week the ECB meet to discuss interest rate rates and although it is likely rates will remain at 1%, with disappointing economic data the ECB have left the option of further rate cuts open.

GBPUSD (Cable)

Whilst there have been signals recently that the US economy has weathered current financial storm, the employment market remains very fragile. As seen in June when Non-Farm Payroll data was worse than forecast. All eyes this week are on July figures, which are announced on Friday. Furthermore a return in risk appetite (as seen in equity markets) has caused US dollar to weaken as investors exit the "safe haven" of US dollars.

GBPCAD (Loonie)

The Bank of Canada (BoC) has indicated in its latest forecast that the recession is over. Mark Carney the BoC Governor expects economic growth for Q3, which would mark an end to the worst recession since WW2. With this in mind having fallen from eight month highs against Canadian dollar, sterling is likely to struggle to make any significant gains in the short-term.

GBPZAR

The recent fall in commodity prices in particular precious metals has seen the rand under selling pressure, with the risk of further selling a distinct possibility. However with South Africa hosting the FIFA World Cup next year will no doubt help to underpin the SA economy.

GBPAUD

It seems we have not mentioned "carry trades" for a long time so just to remind you this is when someone borrows currencies with a low interest rate such as the yen and invests that money in higher rate currencies such as the Aussie dollar. The reason for mentioning it now is the AUD has benefitted recently from a return of carry trades as risk appetite increases on the back of a recovery in Australian economy.

GBPNZD (New Zealand dollar)

According to a recent poll consumer confidence in New Zealand has increased sharply to the highest in 7 years. This is on the back of rising house prices for Q2 2009 (the first time since 2007) with borrowing costs at a record low. However like many economies unemployment is rising and likely to hit a seven year high of 5.6%, which might give sterling an opportunity to make some gains.

We hope this newsletter has been useful and for further information please contact your Pure FX Currency Dealer on +44 (0) 1494 671800. Nothing in the newsletter should be construed as advice or guidance as to when to buy or sell currency.