Slow economic growth is likely to hit sterling hard
A tumultuous time for the global economy has meant a volatile currency market, something that makes managing finances difficult for exporters. Zoe Fiddes, UK branch manager of Easy Forex Trading, tells us what to look out for on the currency markets this week
The eurozone debt crisis has been in the forefront of investors' minds for many weeks now. The problem has spread like a virus across Europe with Greece first catching the debt 'flu some 18 months ago. The response from the EU and the International Monetary Fund (IMF) has been to bailout these countries in the form of cash loans in tranches in order to buy them time to cure their economic illnesses.
Ireland, Portugal and Spain are also facing tough times.
As the influenza re-emerged earlier this year the euro currency was hit hard. However, the market consensus now is that the US, as well as the EU, is dangerously close to recession.
The UK is highly dependent on exports to the EU and negative growth will have a direct affect on the British economy. So how will all of this affect the currency market?
What we have observed so far is that at times of global concern investors become nervous and look towards safe-haven investments in preference to riskier assets and currencies.
Safe havens include gold, the Japanese yen (JPY) and the Swiss franc (CHF).
A brief glance at a gold chart clearly shows that the price of gold has rocketed to new highs above $1,800 (£1,092) per ounce. This is an incredible price increase of over $600 (£364) in a year. The Swiss franc is also at unprecedented highs against other major currencies; the euro has lost a third of its value against the franc with EUR/CHF falling from 1.5000 (Dec 2009) down towards the parity level of 1.0000.
The currency market is the most traded financial market in the world with $4trn (£2.4trn) traded daily.
Trading is 24 hours a day from the market opening in Sydney on Monday to market closing in New York City on Friday evening, and it is considered to be liquid, which means it is easy to get a tradable price at any time.
The global turmoil has caused high levels of volatility recently and these large moves, like the ones we have seen in EURCHF, are attracting new traders wanting to be part of the forex action.
Financial, geographical or political events can affect pricing and investors need to follow financial news forecasts to make the most of their forex investments.
This week we are preparing for the release of the eurozone purchasing managers' index (PMI) figure for the manufacturing and service sectors.
The PMI data assesses business conditions in a particular sector and a value above 50 indicates an expected increase in business, while values below 50 signal an expected deterioration.
Forecasts of these figures can be found on financial calendars which are freely available online. Since the whole world can view these economic forecasts a price move often occurs in advance of the announcement and this is called 'pricing in'.
For example, the eurozone composite PMI for July was forecasted at 50.8 and the euro moved up against the British pound and the US dollar in the hour prior to the announcement of the actual figure.
Also this week, the UK growth domestic product (GDP) for the second quarter will be released. GDP is a good measure of economic growth and is closely watched by investors.
The UK is currently facing high levels of inflation at 4.4% year on year which is considerably above the Bank of England's target at 2%. At the same time jobless claims are high.
We could be facing stagflation where inflation is high and economic growth rate is low. The GDP figure on Friday may indicate slow growth and subsequently we may see sterling suffer as a result.
The GDP figure on Friday may indicate slow growth; subsequently we may see sterling suffer as a result