Foreign Exchange Market Overview

Fri, March 18, 2011

Following Wednesday's declines, the British Pound rallied against the US Dollar to set a daily high of 1.6171. The rise in the exchange rate was the result of /can be attributed to two factors. The first being that risk aversion amongst market traders began to fade, meaning that traders moved away from the Dollar, towards higher yielding currencies. The second factor was the release of a report from the Bank of England on public inflation expectations. The report revealed that the general public had thought that inflation had increased by 3.9% to 4.4% since November, when the survey was last conducted. This marked the highest reading of inflation since August 2008. The report lends a great deal of weight to the idea of the Bank of England increasing the bench mark lending rate within the next 6 months, despite Governor Mervyn King insisting that the non-core inflation rate, which includes volatile food and energy prices, will come down. Confirmation of a rate hike will have to wait until March 23rd when the BoE release the minutes to the last policy meeting. Should the minutes show that more members of the Monetary Policy Committee decided to vote for normalising monetary policy, the Pound could see further gains as rate hike expectations intensify.

Consumer confidence rose in February according to a report released by the Nationwide Building society in the early hours of this morning. The index fell from January's revised figure of 48 to 38, falling short of expectations for a reading of 47, providing a negative outlook for the region.

The Euro appreciated against the weaker Dollar as risk aversion lessened, pushing the currency pair to a high of 1.4052, while against the Pound the Euro rallied to see the exchange rate dip to a low of 1.1481 before bouncing back to just above 1.1510. The Euro benefitted from the successful auction of Spanish debt with the Spanish government selling €4.1 billion in 10-year and 30-year debts, which helped ease the negative outlook brought on by the risks of sovereign debt contagion.

Expectations for a rate hike in April are also responsible for the Euro's performance, as Credit Suisse has gauged 100% of traders to expect a 25 base point increase next month. However there is some debate as to whether the European Central Bank will stall raising interest rates, as the Japanese crisis weighs on global trade. Today the economic calendar is awash with European data, the most influential of which being Germany's Producer Price index which rose by 6.4% annually to beat estimates for 6.3%. The outcome adds to the mounting evidence of rising inflation, which the ECB is expected to tackle by increasing interest rates as early as April.

As mentioned earlier the US Dollar weakened as risk aversion ebbed, following the G7's intervention in bringing down the exchange rate on the Japanese Yen, and talks into co-ordinating a safe solution for containing Japan's nuclear situation at the Fukushima Daiichi plant have also eased global concerns. However given that little progress has been made in cooling the over heating reactors at the plant, yesterday's gains against the Dollar could easily be erased if the situation worsens.

On the data front Consumer Prices for February rose at a greater pace than expected, as the annualised inflation rate advanced 2.1% instead of the forecasted 2.0% increase. Industrial production fell in February by 0.1%, disappointing economists who had forecast that production would rise by 0.6%. Conversely the Philadelphia Fed manufacturing index showed that activity in the third federal district actually gathered pace in March and reversing the slowdown in activity that witnessed in February.

Today the US is not scheduled to release any economic data, meaning market participants will be monitoring conditions in Japan, as this will ultimately decide the direction the US Dollar will head. Should conditions worsen in Japan then the Dollar will most likely appreciate from safety lead trading, otherwise the Dollar may continue its downward trend from yesterday.

Data Releases