Foreign Exchange Market Overview

Fri, March 04, 2011

Following yesterday's disappointing Services PMI, the Pound slipped against the US Dollar to post a low of 1.6252. Forecasts had called for service based activity in February to grow at a faster pace than January's reading, however when the report was released, it was revealed that growth in the sector slowed, posting a figure of 52.6 compared to January's 54.5. This Friday morning a negative outlook for the UK was further reinforced by the Halifax House Price survey which saw the value of homes in the UK fall by a greater margin than was expected in February. Forecasts had called for a decline in house prices since January's survey recorded a 0.8% rise in the value of homes.

The Euro rallied yesterday following the combined effects of a reinforced outlook from the economic docket as well as commentary from ECB President Jean-Claude Trichet over rate hikes. Rising retail sales in Germany and across the Euro-zone, falling unemployment in France and 4th quarter GDP figures showing that the European economy expanded by 0.4% all added to the Euro's buoyancy. On the negative side of the docket, the Services Purchasing Manager's Index recorded a lower than expected reading for both Germany and the composite euro-zone region, however it is worth noting that the actual figure sat above the 50 point base line for growth. The biggest impact on the Euro however, were Trichet's comments following the central bank's interest rate decision. Although the ECB held interest rates at the historic low of 1.00%, in the press conference that followed Trichet stated that given the recent surge in energy and food prices, the ECB was prepared to take action against inflation and that the possibility existed for an interest rate increase to take place as early as April. The bank head added that "Strong vigilance is warranted with a view to containing upside risks to price stability," and noted that the on going turmoil in the Middle East is likely to push up oil prices higher. The overall effect of this revelation was for the EUR/USD exchange rate to set a high of 1.3952 and for GBP/EUR to fall back to a low of 1.1655.

US figures on Thursday were encouraging. The ISM non-manufacturing index rose for the 15th consecutive month, beating analyst forecasts at the same time, while non-farm productivity also came in above the consensus. Weekly initial and ongoing jobless claims fell by a greater margin than was expected by economists, with initial claims posting the lowest reading since May 2008. The data reinforces comments by the Federal Reserve Chairman Ben Bernanke that the US job market is beginning to steadily make improvements. Despite the encouraging economic data, the Fed's Dennis Lockhart who heads the Atlanta branch of the Federal Reserve announced during a press report that he held a "more cautious" outlook for US economic growth. Lockhart cited the unrest in both the Middle East and North Africa and the impact this is having on oil prices as the reason for his concern.

With very little data scheduled for release during this Friday's European session, the full focus of market participants will fall to the US employment figures, in particular the Non-farm payrolls report and the unemployment rate for February. Earlier in the week, the market has seen private sector payrolls increase beyond expectations when the ADP employment change report was released on Wednesday, and when taking into consideration yesterday's improvement in weekly jobless claims and comments offered by the Fed Beige book report on Wednesday, the outlook for the Non-farm payroll looks promising. As it stands the highly valued report is expected to show that the economy added 183,000 jobs in February, but counter to this the unemployment rate is expected to increase from 9.0% to 9.1% for the same period. If both figures come out as expected then it's possible that Dollar price action will turn volatile as the mixed data provides an uncertain outlook for the nation's employment situation.

Data Releases