Foreign Exchange Market Overview

Wed, March 09, 2011

Doubts over how quickly the Bank of England would raise interest rates began to sink into the minds of market participants yesterday, following the release of two economic surveys. The first was the British Retail Consortium's retail sales figure for February, which had shown that sales growth had weakened since January to post the fastest annual declines in 10 months. The second survey, the Royal Institute of Chartered Surveyor's house price balance, reported that house prices continued to fall across the UK in February albeit at the slowest pace since July. The actual figure beat analyst expectations for a reading of -27 with -26, still the overall view held by economists is that the UK's housing market still remains poor.

While the past two BoE policy meetings has seen a shift toward rate hikes in both rhetoric and in the voting pattern, Tuesday's economic data, along with last week's soft services Purchasing Manager's Index, have pushed back expectations for an immediate rate hike. As a result the Pound weakened to set a daily low of 1.6123 and 1.1576 against the US Dollar and the Euro respectively. January's Visible Trade Balance sheet headlines the UK's economic data today. Economists expect to see that the trade deficit has shrunk since December. Such an outcome should provide some support to the Pound.

German factory orders for January stood out as the most significant of Europe's economic data to be released yesterday. The report came out with a 2.9% increase in orders, which was better than economists had expected and an improvement from last month's 3.6% contraction. Despite the positive outcome, the Euro began to weaken against the US Dollar, with the exchange rate falling to a low of 1.3861. The decline could be attributed to Moody's recent downgrade to Greece's sovereign debt rating to B1 from Ba1. This once again highlighted the issue of underlying weakness in many of the member states, and it is believed by many economists that the proposed rate hike in April could damage weaker EU members who are already struggling to tackle their debt situation.

Today will be another day of limited Euro-zone data, with German industrial production figures marking the only piece of economic data out from the region. Forecasts call for an improvement in production output following last months declines. Although a positive outcome would bolster the Euro, the issue of sovereign debt could limit the gains the Euro makes against the major currencies.

The US Dollar rallied on Tuesday to end what has been for the most part, a 3 week downward trend for the currency. The Dollar's appreciation could be owed to a rise in the Dow by 1.0% and a 0.9% advance in the S&P 500 index, as the meagre offerings on the economic docket did little to provide an improved outlook for the world's largest economy. In point of fact the Small Business Optimism index for February fell short of expectations to post a minor improvement in the sentiment index, but the gauge of economic optimism that was released later into the session, rather than improve as was expected, actually fell from February's reading. Looking ahead, the docket has little to offer once again for the US. Crude and gas inventories take on more significance given the recent turmoil in Libya and the Middle East, with falling reserves threatening to push oil prices up further. However given the extremely light data, risk sentiment will mostly likely hold power over the Dollar's movements this afternoon so it wouldn't be out of the ordinary for the Dollar to benefit from its safe haven status.

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