Nigel Hodges of Currency Solutions

Much like Jenson Button's return from racing purgatory this month, financial markets have recovered their bullish momentum. Yet unlike Button, who will hopefully maintain his momentum in Formula 1, the level of unknowns in the global economy have forced investors to limit their exposure to risk, dragging down currency exchange rates in the process.

Early this week financial markets from Tokyo to Sydney continued to gain ground on the back of improved prospects for global recovery. Despite US unemployment hitting a 26-year high, overall sentiment was positive as it appeared that the worst of the recession was over. Currency exchange rates were boosted and the pound and euro touched on new highs against the dollar. Later in the week however, with the emergence of data that likely represents the trough of the downturn, the gain in equities stalled as investors began to think twice before taking on more risk.

In the UK, the Bank of England's quarterly inflation report has dominated headlines this week. The report included growth and inflation predictions, as well as hints regarding monetary policy in coming months and had an impact on the underlying trend in sterling. The Bank predicted growth would bottom out this quarter at -4.5% and inflation would be still be running under 2% until 2011. Governor King also noted that economic recovery is likely to be a gradual process with the Bank utilising the full extent of the quantitative easing programme.

In the UK labour market, unemployment has risen to 2.2 million and British Telecom announced plans to cut 10% of its workforce. This amounts to 15,000 jobs and comes on the back of a GBP1.28 billion profit loss in the last three months.

The sterling-dollar exchange rate began the week by surging to a four-month high of 1.56. This strength was derived from the view that the pace of recession was easing and the euro, Australian, Canadian and New Zealand dollars also advanced on the greenback. Midweek, uncertainty over the Bank's inflation report began to weigh on the pound and at present the trend in sterling remains neutral.

In the US, markets began the week in positive mode as figures showed the economy shed less jobs in April than in any month since October. This sent the dollar to a four-month low against the pound and seven-week low against the euro.

However as a number of unknowns remain in the global financial system, investor confidence waned as the week went on. Major General Motors shareholders dumped shares prompting speculation that bankruptcy was imminent for the company and Ben Bernanke urged US banks to raise capital independently.

Later in the week, news that US retail sales slumped -0.4% in April raised further uncertainty. This took markets by surprise after two consecutive months of gains and risk appetite took a hit, sending the dollar and yen higher against the perceived "riskier" currencies.

The euro also gained ground earlier in the week, climbing to 1.37 on the US dollar as improved confidence increased demand for the single currency. Later in the week calls for "stress testing" of European banks and weaker than expected EMU industrial production figures saw the euro slide against the dollar and pound. Overall though, currency exchange rates remain relatively unchanged and the euro is retaining support above 1.36 on the dollar and 0.89 on the pound.

In eastern Europe, zloty has continued to weaken against the euro throughout the week, currently trading at 4.49. Retail sales in China climbed by 14% in April from the previous year and this helped strengthen global equities. India, China and Brazil are expected to be a major drivers of global recovery.

At present risk appetite and risk aversion continue to be the major influences on currency exchange rates. Recession has skewed the normal business cycle making predictions difficult, hence the continual revision of growth forecasts from governments and economists alike. Following the recent 8 week gain in equities, the bullish momentum has been waning as investors become wary of taking on more risk.

If you need to transfer currency in future, get yourself registered with Currency Solutions and we can watch the markets on your behalf and ensure you get the best deal when it comes to currency transfer.

Cycling for Charity

And finally, if you want to do something positive with your currency, two of our directors, Hakan and Tien are about to embark on a 7 day cycle from Bayonne to La Rochelle in France. All funds are donated to Islamic Relief, an international relief and development charity that aims to alleviate suffering among the world's poorest people.

To donate to this worthy cause, please visit http://www.justgiving.com/hakanenver

Have a good weekend!