Market Report- Few Glimpses of the Investment market volatility

At Gerard Associates Ltd we continue our daily look at factors affecting markets and currencies allowing some insight into conditions affecting exchange rates.

Cash and income timing from a UK Pension or QROPS (Qualifying Recognised Overseas Pension Scheme) should be considered to maximise the Pension, QROPS and investment income taken.

Investment market volatility and currency exchange remains a challenge. The global economics are volatile and unprecedented in history. Currency exchange continues to concern expats with UK Pensions, QROPS and now QNUPS (Qualifying non UK Pension schemes).

Pair High Low

GBP/EUR 1.1959 1.1611

GBP/USD 1.6257 1.5963

EUR/USD 1.3859 1.3428

GBP

The pound has performed relatively well over the last month staying above the key $1.60 mark against the dollar for most of that time and just falling short of the psychological barrier of €1.20 against the euro. Sterling started the month on the up as both PMI Manufacturing and Construction showed an improvement in January but the highs were hit mid-month after the UK Consumer Price Index showed inflation stood at 4%, double the Bank of England’s target. This brought on a frenzy of sterling buying as investors felt an interest rate hike was definitely on the cards in the near term future.

In typical style Mervyn King, Bank of England Governor, at a press conference played down the speculation of rate rises and in a particularly dovish speech suggested that although rates would be going up it would not be any time soon. However, only a few days later The Office National Statistics showed Retail Sales for January had gone through the roof. The sharp rise to 1.9% from -1.4% the previous month was blamed on December’s poor weather but prompted investors to buy sterling again and erased all of the losses after King’s comments, hitting 3 week highs against the dollar and euro.

Next up on the list was the minutes of the Bank of England’s monetary policy meeting held earlier in the month. Speculation was rife that Andrew Sentance and Martin Weale would be joined by at least one more member in voting for a rise in rates. Sentance himself had said that the minutes would be “more interesting than usual”.

The minutes eventually confirmed that a third member Spencer Dale had voted for a rise. I think perhaps the markets were expecting more of shock and despite moving further towards a rate rise the pound fell.

The second printing of the fourth quarter GDP figures was expected to give the pound a slight boost. December’s harsh weather was to blame for poor construction and manufacturing figures pulling the first estimate down to -0.5%. However despite having factored in the bad weather, GDP contracted further posting a figure of -0.6. This for the time being has put to bed the ideas of a rate rise in the next few months as the economy seems far too weak.

The pound’s near term strength will be largely governed by how the Bank of England manages to balance rising inflation with a weak economy.

EUR

Against the dollar the euro has had a strong finish; it seemed at mid-way through February the euro would remain range bound around the $1.35 mark as risk on and off sentiment moved the rate slightly in each direction.

Towards the end of the month the euro broke through the $1.38 mark around the same time in managed to push back below $1.17 against the pound as hawkish comments from the ECB suggested it was not only the British who were talking about interest rate hikes.

Periphery debt problems still plague the euro zone and will undoubtedly trouble the policy makers over the coming months. Like the UK, inflation is running higher than is ideal and rate hikes have been spoken about, but aside from France and Germany many of the weaker nations in the euro zone will really struggle to keep their heads above water with tighter monetary policy.

It appears that after the weekend‘s voting Ireland will be governed by a coalition government who will be keen to renegotiate the bailout package given to them last year as their finances collapsed.

After a successful bond auction a few weeks back, Portugal was thought to be out of the woods but many believe a bailout is imminent. Ireland’s renegotiation could make harmonising a bailout if called upon difficult to agree on.

The markets generally like the euro and we will probably see gains in the euro especially against the US dollar if the talk of nations seeking bailout remains quiet.

USD

Of the three nations I have spoken about the US seems to be the one lacking any real direction at the moment. Data releases seem to be more difficult to predict than in other countries and a result there have been surprises causing the US dollar to rise and fall over the last 4 weeks.

Risk aversion has helped the dollar to some extent. Investors have become increasingly concerned about the Middle East and headed towards the safe haven currencies such as the dollar bit it is the Swiss franc that has been the biggest winner hitting an all-time against the dollar last week.

An interview yesterday suggested that the US would be the last increase their interest rates and when they do it could be a long as 12-13 months away. The policy makers that make up the Fed are in two camps, those that agree with the second phase of quantitative easing and those that want the programme ended early. Whilst this dispute continues, rates will remain on hold and the euro and pound will both make gains.

Consumer confidence is high in the US, but unemployment still is causing concerns. If in the next month retail sales meet expectations and the labour market improve the dollar might not see further losses. However many feel that it is only a matter of time before cable breaks the $1.63 mark.

Gerard Associates Ltd advises expats and people considering living abroad on the technical and currency options available for Pensions, QROPS, QNUPS and investments in a clear format allowing all customers to make an informed choice. Our service encompasses Pension including QROPS and QNUPS and investments in a clear format allowing all customers to make an informed choice.

This with the reassurance and security of UK FSA authorised and regulated advice - essential for your security.

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