Daily Currency Blog Report & Forecasts

GBP-EUR 1.24708 GBP-USD 1.568 GBP-AED 5.7565 GBP-JPY 124.71 GBP-CAD 1.6098 GBP-CHF 1.4991 GBP-HUF 374.67 GBP-TRY 2.8847 GBP-AUD 1.6016 GBP-ZAR 13.0765 GBP-NZD 2.0698 GBP-SGD 2.0046			GBP-PLN 5.426 GBP-HKD 12.1701 GBP-THB 49.625 GBP-MYR 4.9396 EUR-USD 1.2564 EUR-AED 4.6132 EUR-TRY 2.3113 EUR-AUD 1.2828 USD-CAD 1.0287 USD-JPY 79.51 USD-NZD 1.3193
(Please note these rates were taken at 1:00pm BST, rates do fluctuate every 2 – 3 seconds)
If you need any other exchange rates then please don’t hesitate to contact me.

Q1 UK GDP was revised down to -0.3% q/q yesterday, the expenditure breakdown showed a strong rise in government spending up by 1.6% q/q, while household consumption was subdued up only 0.1% q/q. The latest BoE minutes and UK Inflation Report suggest there is a bias for more QE. There has been evidence of a weaker domestic economy and risks to the domestic outlook are persisting from the euro area and the possibility of the BoE opting for further QE has increased. This will likely weigh on GBP performance against most currencies; but with a lack of real appetite for EURs, Lloyds TSB expect the downside bias to EUR/GBP to remain.

There was nothing of real significance announced at the EU Summit; and the weaker Eurozone PMIs and German IFO numbers confirms economic conditions are looking worse in Q2 and this saw continued pressure on EUR. EUR/USD made new lows yesterday, trading down to 1.2516, and continues to look vulnerable to the downside. But EUR/USD is down around 1.8% on the week, so there could be some position squaring into the weekend, but any moves to around 1.2580/1.26 should be seen as good selling opportunities. Risks continue to look skewed to the downside for EUR/USD, and right now it’s hard to see a trigger for a turnaround in sentiment ahead of the Greek re-election in June. Today’s economic calendar is relatively light in terms of data, giving markets further time to digest events unravelling across the euro area. The much weaker than expected euro area May flash PMI reading yesterday highlighted the current economic fragility of the single currency, which only narrowly avoided a ‘technical recession’ in Q1. Moreover, the PMI survey results, combined with the sharp drop in the German IFO business index, point to cracks forming in ‘core’ countries such as Germany and France. With Greek elections looming and the debate between balancing fiscal austerity with efforts to stimulate economic growth still raging amongst policy makers, markets are likely to continue to be sensitive to related news flow for sometime. Danske believe deteriorating PMIs could trigger a move from the ECB. Danske now expect the ECB to lower interest rates at the June meeting. Danske expect a one-off rate cut of 25bp – leaving the refi rate at 0.75%. Deposit rates are likely to be left unchanged while the marginal lending rate is expected to be lowered 50bp to 1.25%. If market sentiment worsens on Greek or Spanish concerns, this could trigger additional non-standard measures such as longer maturity LTROs. This is not Danske‘s main scenario though as we continue to expect a viable solution in Greece. The euro area composite PMI dropped from 46.7 in April to 45.9 in May driven by a drop in manufacturing PMI. The German Ifo also gave in and dropped in May.

In terms of today’s data releases, German GfK consumer confidence before June is likely to be little changed at 5.5 versus 5.6 in May. German household consumption is anticipated to be a key contributor to the German economy this year and was up by 0.4% q/q in Q1, helping to support the 0.5% rise in GDP over the same period. After yesterday’s IFO business index indicated a sharp drop off in retail activity, markets will be looking for confirmation that German consumers are willing to maintain their spending levels. The sharp positive reversal in German retail sales in March, which were up by 0.8% after a 0.9% decline in February, provided markets with some confidence that this was the case last month. Similar consumer confidence data in other euro area countries are also due for release. The French Insee consumer confidence index for May is likely to show a slight decline to 87 from 88 in April, which is still above the 82 reading for the first two months of the year. Meanwhile, Italian retail sales for March are likely to have contracted by 0.3% on the month, compared with 0.6% rise in February.

The most recent Greek polls suggest that it remains a close call who will become the biggest party in the second election. A poll published in a Greek newspaper last night suggests that Syriza is currently at 30%, New Democracy at 26% and PASOK at 15%. The main parties continue to attract more support. The poll was conducted between 18 and 23 May. In this period small Democratic Alliance (that gathered 2.5% in recent polls) joined forces with New Democracy, which is probably not fully reflected in this poll.

The final reading of the US Michigan consumer confidence survey is also expected to remain unchanged at 77.8 in May. Both the Conference board and US Michigan consumer confidence surveys have year to date been above levels experienced over the same period last year. The USD index continued to edge higher making new highs of 82.41 early this morning. USD continues to benefit from the broad EUR weakness and the on-going weaker tone in market sentiment. The weaker Eurozone PMI numbers yesterday highlighted the economic concerns from Europe and the continued uncertainty about the future membership of the Eurozone will likely see the USD upside bias remain. For today, the USD will likely remain range bound but see risks of some corrective downside moves ahead of the weekend.

The key policy rate was left unchanged at 5.50% at the SARB MPC meeting today. This came out in line with market expectations. Looking ahead, Danske think that the South African central bank will stay on hold in the coming months, as fundamentally there is not much room for monetary easing, given that inflation remains elevated and the weak rand poses further risks to inflation.

The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The author(s) cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

GBP-EUR 1.24654 GBP-USD 1.5675 GBP-AED 5.7596 GBP-JPY 124.39 GBP-CAD 1.6057 GBP-CHF 1.497 GBP-HUF 372.35 GBP-TRY 2.8968 GBP-AUD 1.6027 GBP-ZAR 13.0885 GBP-NZD 2.079 GBP-SGD 1.9978			GBP-PLN 5.4105 GBP-HKD 12.1701 GBP-THB 49.475 GBP-MYR 4.9307 EUR-USD 1.2575 EUR-AED 4.6161 EUR-TRY 2.324 EUR-AUD 1.2856 USD-CAD 1.0241 USD-JPY 79.37 USD-NZD 1.326
(Please note these rates were taken at 11:45am BST, rates do fluctuate every 2 – 3 seconds)
If you need any other exchange rates then please don’t hesitate to contact me.

The Bank of England’s top decision makers indicated that more of them were on the verge of voting to increase stimulus measures at their lasting meeting. While the Monetary Policy Committee voted 8-to-1 to keep the Bank’s quantitative easing programme steady at £325bn, the minutes of the meeting showed that “for several members, the decision not to expand the asset purchase programme at this meeting was finely balanced”. UK retail sales registered their biggest monthly fall in April, with fuel sales tailing off dramatically after the panic buying in March, when motorists were encouraged by the government to stock up on petrol. Today sees the second release of Q1 GDP for the UK. The preliminary estimate fell 0.2% q/q, suggesting that the economy slipped back into recession in Q1. Since then, the release of weaker construction output suggests a downward revision to the first estimate and we look for it to be revised to -0.3%. Today’s release will also provide the first insight into the performance of the demand components.

No “rational person” would want to see Greece leave the Eurozone, Nick Clegg will say today, warning that Britain will be worse off if the currency starts to break up. Markets tumbled again on Wednesday in reaction to fears that Greece’s exit was being prepared. David Cameron was in Brussels pleading with EU leaders to deal decisively with the Greek debt crisis to prevent a “disorderly” collapse of the euro. The Prime Minister warned other member states that there was a risk of the “contagion” spreading from a Greek exit, which would have dire consequences for Britain, The Telegraph writes.

Markets will take some time today to digest last night’s EU leaders informal dinner and the extent of their commitment to supporting economic growth. Although the euro area as a whole avoided recession in Q1, the recent falls in the PMIs highlight the strong risk that economic conditions have worsened among the periphery countries. Today’s euro area ‘flash’ manufacturing and services PMIs are forecast to rise slightly but remain deep in territory suggesting another monthly contraction. Meanwhile, reflecting heightened tensions following recent European elections, the German Ifo is forecast to slip back to 109.7 from 109.9, although this still points to positive economic activity. Former Greek Prime Minister Lucas Papademos has said that although a Greek exit is unlikely, “it cannot be excluded that preparations are being made to contain the potential consequences” of such a scenario. He later clarified that he has no specific knowledge of any countries of institutions making contingency plans but could not “exclude the possibility”. According to an article by Reuters yesterday afternoon, three officials of the Eurogroup Working Group (EWG) have said that countries should be planning for a Greek exit. “The EWG agreed that each Eurozone country should prepare a contingency plan, individually, for the potential consequences of a Greek exit from the euro,” one official said. Germany’s Bundesbank has said that a withdrawal from the single currency would be “considerable but manageable”. EUR/USD dropped to a two-year low and is this morning trading around 1.258.

Gloomy comments from the US Congressional Budget Office (CBO) were also dampening the mood yesterday. The CBO warned of a risk of recession for the world’s largest economy in 2013 if the Bush-era tax reductions were allowed to expire at the same time as spending cuts come into effect. It said that the US economy could contract by 1.3% in the first half of next year as the government falls off a “fiscal cliff”. US durable goods are forecast to have risen 2.0% m/m in April following a 4% fall in March. Excluding the volatile transport component Lloyds TSB look for a 1% monthly rise. Also today the inaugural ‘flash’ US manufacturing PMI will be released.

The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The author(s) cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

GBP-EUR 1.24322 GBP-USD 1.5726 GBP-AED 5.7739 GBP-JPY 124.83 GBP-CAD 1.6085 GBP-CHF 1.4929 GBP-HUF 375.65 GBP-TRY 2.9058 GBP-AUD 1.6124 GBP-ZAR 13.1915 GBP-NZD 2.0973 GBP-SGD 2.0099			GBP-PLN 5.422 GBP-HKD 12.2131 GBP-THB 49.525 GBP-MYR 4.9407 EUR-USD 1.2657 EUR-AED 4.6422 EUR-TRY 2.3374 EUR-AUD 1.297 USD-CAD 1.022 USD-JPY 79.39 USD-NZD 1.3327
(Please note these rates were taken at 11:50am BST, rates do fluctuate every 2 – 3 seconds)
If you need any other exchange rates then please don’t hesitate to contact me.

Softer CPI and PSNB numbers than expected and calls from the IMF for the UK to do more QE put pressure on GBP yesterday. Retail sales and MPC minutes this morning could weigh further on GBP. April retail sales are expected to reverse the strong rise in March, declining by 0.7% m/m ex fuel. But the MPC minutes will likely have the most potential for market impact. We look for more clarity on the Bank’s decision to keep QE on hold, even though they lowered growth and the medium term inflation outlook. We expect a dovish tone and suspect there will be some bias towards more QE, particularly if downside risks from the Euro area materialise. Given last week’s inflation report, we see risks there could be a real close call on the vote for more stimulus; Lloyds TSB economists expect a split decision, with two members likely to have voted for more QE but should we see a closer call, this would see increased pressure on GBP. UK price rises slowed faster than expected in April pushing the inflation rate down to 3%, the lowest it has been in two years. Analysts had expected the Consumer Prices Index to fall to 3.1%, from 3.5% in March and said that the bigger fall would encourage the Bank of England to increase its £325bn stimulus programme. The UK public sector posted a surplus of £16.5bn in April 2012, according to data out from the Office for National Statistics. That however was entirely due to the large one-off transfer of the £28bn Royal Mail Pension Plan to the government.

The Bank of England should cut interest rates, print more money and ease the regulatory pressure on banks as part of a radical set of measures to return Britain to recovery, the International Monetary Fund has urged. Warning that weak growth was putting the country at risk of permanently high unemployment, the Bretton Woods institution called for swift and co-ordinated action between the Bank and the Treasury. If the joint efforts had failed to have much effect by November, the Government should then consider cutting taxes and boosting infrastructure spending by as much as £30bn, said the IMF. In an unusually alarmist annual assessment of the UK, IMF managing director Christine Lagarde said that “growth is too slow and unemployment too high, and policies to bolster demand before low growth becomes entrenched are needed,” The Telegraph reports.

Eurozone leaders are wasting time with squabbles, piecemeal bailouts and appeals for illusory global aid while the Continent “wallows” in unending crisis, China’s top foreign investor has said in a rare outburst of frustration. Jin Liqun, the chairman of China’s $440bn sovereign wealth fund, ripped up diplomatic protocol by delivering a lascerating attack on Europe’s ineffectiveness in governance. “The debt crisis is actually much less devastating than the handling of the debt crisis,” said Mr Jin, who warned that political gridlock was driving the eurozone deeper into the woods. “Too much time has been wasted on endless bargaining on terms and conditions for piecemeal bailouts,” he said, adapting a Shakespearean quote to add: “Frailty, thy name is leadership,” writes The Times.

EUR/USD traded back below the 1.27 level ahead of this evening’s EU summit will. In the absence of major news ahead of the meeting Lloyds TSB suspect EUR/USD will likely remain range bound but see risks of a small upside should there be some corrective moves ahead of the meeting but will likely be limited with sentiment likely remain subdued. The meeting will centre on growth but we are sceptical what can be achieved at this point and whether it will be sufficient to trigger a significant risk-on.

The Irish people will vote on the European Fiscal Stability Treaty on Thursday 31 May. The referendum is crucial as it determines a crossroads for Ireland. Securing a ‘Yes’ to the treaty is, in Danske’s view, essential for stability and further economic recovery. A ‘No’ would lead to a very uncertain financial outlook with potentially large economic ramifications. Polls show a lead to the ‘Yes’ side but the turmoil in Greece and Spain, combined with some uncertainty over the referendum, means there will be excitement until the very last minute.

The Organization for Economic Co-operation & Development (OECD) has today backed Hollande’s call for eurobonds as “additional measures towards the establishment of a ‘growth compact’” are needed to combat the impact of austerity. The OECD also cut its Eurozone gross domestic profit growth forecast from 0.2% to -0.1% for 2012.

Yesterday’s existing home sales showed a rebound in housing activity up 3.4% m/m in April, today’s new homes sales are also expected to rise. The USD index traded higher overnight, making new highs at 81.830 the highest level since 2010. Events from Europe will be the key focus today with BoE MPC minutes this morning and the EU summit later this evening. Lloyds TSB expect USD to remain range bound but moves will likely be choppy ahead of this evening’s meeting.

The US economy has so far proven resilient to the European crisis and the main risk does not come from slow euro area growth but from financial spillovers. Danske expect financial stress to get worse over the coming month but ultimately expect Greece to stay in the euro area. This means that markets will eventually turn focus back to macroeconomic fundamentals. Notwithstanding the financial risks from the euro area, fundamentals for growth have actually improved in the US. Credit growth is accelerating, the housing market is showing signs of improvement and the oil price has turned into a tailwind. Nevertheless, macroeconomic data have been mixed lately raising fears about the strength of the recovery. The coming month will be key for the market perception of growth. Danske expect the current weakness in data to prove temporary, driven by a payback from mild winter weather. Employment should regain cruising speed in May and payroll growth should return to the underlying trend of 200,000 per month.

The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The author(s) cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.