Foreign Exchange - Pounds Sterling and Euro Exchange Rate Outlook
The US Dollar Exchange Rate is recovering against the euro exchange rate, from 1.3265 at the close in NY yesterday to 1.3187 at 8 am today, the euro rate having tried and failed to make a new high overnight after Asia handed off to Europe. The best the euro rate could do was 1.3297, not breaking 1.3300, when yesterday’s high was 1.3303. These little things count.
The reason for the euro's sharp drop could include bad European data (although the US had bad data yesterday) but is more likely a renewed burst of risk aversion as stock markets everywhere are falling, led by banks. Today UBS reported a big loss and big job cuts, with the CEO saying markets “are very unstable.” The sentiment is back that the recession will get worse before it gets better. This is the reality check we were expecting but it arrived like a gale force wind.
The stand-alone factor behind traders selling euros drop could also be comments by BBK chief Weber, who repeated opposition to an ECB rate cut but said the bank will announce "non-standard measures" in May. This gets a little confusing. You’d think that preservation of the rate differential would favor the euro exchange rate.
But no, the market is rewarding cuts these days, and punishing acknowledgement of needed emergency measures.
We already saw risk aversion emerging when the US reported retail sales down 1.1% in March and the stock market fell. Weaker stock markets led to an unwinding in yen crosses that pulled dollar/yen down. In fact, the yen rose against everything as risk appetite was pared in every time zone. So much for the carry trade story. It’s possible that the halt in the dollar slide against the Mexican peso is meaningful, just ahead of the 200-day moving average. The peso is not the best proxy for risk appetite (that’s probably the AUD/JPY), but it’s not chopped liver, either. The peso, like any emerging market currency, can continue to rise only if foreign exchange traders think the recovery is here. We say the recovery is not here and recognition of that sad fact should be bad for emerging market currencies. Not everyone is Singapore.
One side-effect has been the emergence of sterling/yen, a favorite of Japanese securities houses, and even pounds to euros, which has fallen into oversold territory. As a result, sterling is strong against the dollar, despite appearing overbought and facing the round number 1.5000, always an obstacle. This morning it breached the level for a few minutes for the first time in three months, while also hitting a 6-week high of 88.12 pence - but it has pulled back sharply in both cases. Some analysts attributed the strong sterling tone to a less-bad RICS housing report that shows (perhaps) "green shoots."
Pounds to US Dollars = 1.4984
Pounds to Euros = 1.1332
Euro to Pounds = 0.8818
Pounds to Australian Dollars = 2.0614
Bye For Now
Barbara Rockefeller
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