Foreign Exchange Market Overview

Thu, March 10, 2011

The Pound regained some ground against both the US Dollar and the Euro yesterday, with the currency peaking at 1.6243 against the Dollar and touching 1.1672 versus the Euro. The Pound's rebound could be attributed to the sharp drop in the visible trade balance deficit for January. The deficit in trade goods narrowed from £9.7 billion in December to £7.1 billion to mark the smallest deficit to be seen on the balance sheet for over a year. The larger than expected decline in the deficit was owed to a surge in exports and a decline in imports.

Today holds the most significance for the UK this week, as the Bank of England is ready to announce the month's interest rate decision at 12:00 GMT. Economists widely believe that the central bank will leave the interest rate unchanged and hold the current stock of asset purchases at £200 billion, yet despite this the rate announcement could stoke an upward run on the Pound as economists anticipate the BoE to normalize monetary policy later this year. However before the BoE makes its announcement, the docket is scheduled to see the release of January's industrial and manufacturing production figures. The market concensus calls for industrial production to have slowed slightly since December, while manufacturing output has been forecast to rise following the previous month's declines. The outcome of the two reports may not actually stoke much reaction in the market for two reasons. Firstly, last week saw the timelier manufacturing PMI report that manufacturing activity increased in February making today's release somewhat redundant, and secondly the report may be overlooked by market traders as the focus falls on the BoE's interest rate decision.

Following Tuesday's declines against the Dollar, the Euro retraced its recent losses on Wednesday, following the release of Germany's industrial production reports. The reports showed that industrial output rose at an annualized rate of 12.5% to beat estimates for an 11.1% advance. As a result the Euro forced its way to a high of 1.3942 against the Dollar. However, recent news has shown that credit rating agency Moody's has downgraded Spain's sovereign credit rating from AA1 to AA2. This is the second downgrade this week by the ratings agency, as earlier in the week Greece also had its credit rating slashed by 3 points, and both events place the issue of sovereign debt back into the forefront of traders' minds, so the Euro is likely to face an uphill struggle until the region gets its finances in order.

Although today's economic calendar is laden with European figures this morning, most will be unlikely to provoke a reaction in the market. Still, Germany's trade balance sheet will play second fiddle to the ECB's monthly bulletin, which has already shown that the trade balance surplus contracted in January from a revised surplus of €12.2 billion to €10.1 billion. The outcome disappointed economists who had forecasted that Germany's trade surplus would rise to €13 billion. However for traders, the ECB's Monthly bulletin will hold more interest, as they scour the report for clues to that will confirm ECB President Trichet's indication that the 7th April policy meeting will result in a rate hike. In particular, traders will look for inflationary forecasts as any strong indication that prices are set to rise over the near-term, which will probably translate as a need for the ECB to take more immediate action (in the form of a rate hike), and this will likely result in Euro appreciation.

Wholesale inventories in the US rose again in January, according to reports released by the US Commerce Department yesterday, with inventories rising slightly higher than economists had expected. Since wholesale inventories typically rise as a result of retailers not purchasing stock, the data suggests that consumers are not spending, which echoes the findings to last week's Personal Spending report, which recorded lower than expected spending during the same period. This afternoon the economic calendar is scheduled to see the release of the US trade balance sheet for January, with economists expecting to see that the nation's trade deficit widened since December to $41 billion. The outcome is likely to weigh on the Dollar and weakness in the currency may carry into tomorrow's session if February's Monthly Budget Statement, which is due for release at 19:00 GMT, shows that public spending has been risen.

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