Foreign Exchange Market Overview

Tue, March 08, 2011

The Pound fell back from a high of 1.6341 against the US Dollar to hold a narrow range throughout the European market and into the North American trading session. Given the lack of economic data this week, The Pound may well continue to float around the mid 1.62 range ahead of the Bank of England's interest rate decision on Thursday. The central bank is expected to hold the interest rate at the historic low of 0.50%, and maintain the current stock of asset purchases at £200 billion, however as the last two policy meetings have shown, there is a growing shift in the Monetary Policy Committee (MPC) towards a rate hike as inflationary pressure intensify. With market traders expecting the central bank to begin rate hikes later this year, the GBP/USD exchange rate could push higher.

Tuesday's figures were released in the early hours of this morning, when it was revealed that the House Price Balance (the difference between estate agencies reporting rising property values versus those reporting falling prices), improved in February to a show some strength returning to the UK housing market, although the balance still remained in negative figures, meaning there are more estate agencies reporting falling house prices than there are reporting rises. The other piece of economic news, the British Retail Consortium (BRC) Sales Monitor, disappointed economists today when sales were reported to have fallen in February instead of sales growth merely slowing, as had been forecasted.

The Euro extended its advance from last week as the currency benefits from the momentum rate hike expectations, to set a high of 1.4036 against the US Dollar and for the GBP/EUR exchange rate to trade just below 1.16. It appears as though traders are ignoring the risks of sovereign debt, as the downgrade to Greece's sovereign credit rating by Moody's Investor Services did nothing to slow the Euro's rise. Indeed Moody's downgraded Greece's credit rate by 3 grades, from Ba1 to B1 and maintained a negative outlook for the nation on future economic growth. As it stands, European policy makers remain divided on how to deal with the issue of sovereign debt, and until the uneven recovery in the Euro-region is address, weakness in the economy will eventually bear down on the exchange rate.

This Tuesday, European figures are looking fairly tame, but of the scheduled releases, Germany's factory orders for January are expected to grow month-on-month by 2.5% after December recorded a decline in the number of orders by 3.4%. In truth the report may have little impact on the market, although a positive out come may help sustain the momentum the Euro is still riding from ECB President Trichet's comments on a rate hike in April. In point of fact, it is more likely that this momentum will be the main driving force for Euro price action today, although it should be noted that the GBP/EUR exchange rate seems to have met resistance in maintaining levels below 1.16.

Monday's US figures were thin on the ground, but commentary from two of the Federal Open Market Committee (FOMC) members, Dallas Fed President Richard Fisher and Dennis Lockhart of the Atlanta Fed indicated that there were divisions amongst Fed Policy makers. Fisher, who has been a longstanding opponent to the Fed's $600 billion bond buying program, admitted that the second round of quantitative easing had been successful in flushing the credit markets with cash and creating conditions for improving the jobs market. However, Fisher no longer saw the need for the stimulus package to remain in place in order to keep the economic recovery going and in yesterday's public address he stated that "Barring some frightful development, I will vote against any program that might seek to extend or enlarge the substantial monetary accommodation we already have provided". In his speech at the National Association for Business Economics (NABE) Economic Policy Conference, Dennis Lockhart said that he would be cautious of any extension to the asset purchase program when it expires in June, but he based this on information that GDP growth would be at 2-4% with inflation firming to the trend rate of 2%, while forecasts call for the employment situation to gradually improve over the next one to two years. However Lockhart also added that if new risks to the recovery effort were to arise, then the he wouldn't rule out the possibility for further fiscal stimulus. Today, indicators on small business optimism are set to improve for February, while March's reading from the Economic Optimism survey is forecasted to improve from February's reading. While the data is looking supportive of the US Dollar, it is more likely that risk sentiment will hold sway over the Dollar's movements today.

Data Releases