Foreign Exchange Market Overview

Fri, March 25, 2011

The Pound continued its downward trend as British retail sales declined more than expected in February, showing evidence of weak consumer spending. According to official figures released by the Office for National Statistics, retail sales recorded an annual growth rate of 1.3% in February, missing estimates for an increase of 2.4%. On a monthly basis sales contracted by 0.8%, a much greater margin than the 0.6% decline economists had forecast. With activity within the private sector remaining subdued, the Bank of England may continue to adopt its wait and see approach, and the Pound could continue to weaken as rate hike expectations abate.

Despite the resignation of Portugal's Prime Minister, Jose Socrates, following the rejection of his austerity plan by Parliament, which could lead the nation to seek a bailout, the Euro remained resilient. Against the US Dollar the Euro rose to a high of 1.4219, and forced the Pound down to a low of 1.1346. However the Euro could easily come under selling pressure if Portugal goes for a snap election. The Euro also remained strong in the face of credit ratings agency Moody's downgrading 30 Spanish banks, whom are viewed as a liability for the country due to their high exposure to the building industry, which imploded during the financial crisis of 2008/9.

The EU Summit in Brussels will be the main focus of traders today, as policy makers continue to discuss providing the European Financial Stability Fund (EFSF) with a 440 billion capital base, although there is some debate as to whether this enough to cover the bailout of some of the larger debt-ridden members. On the data front Germany sentiment indexes headline the economic calendar this morning, with expectations calling for the forward looking GfK Consumer Confidence index to see consumer sentiment weaken in April, while the IFO gauges on business climate and future expectations are all set to weaken in March compared to February's readings. The outcome is likely to weigh on the Euro although the currency's movements will almost entirely hinge on the outcome of the Brussels summit.  

According to yesterday's reports, orders for U.S. durable goods unexpectedly decreased last month by 0.9%, which was largely due to a big drop in orders for machinery. Economists had expected orders to increase by 1.5% compared to the 3.2% increase reported for the previous month. Initial unemployment claims in the U.S. showed a small decrease to 382,000 last week according to reports release by the Commerce Department. The outcome beat estimates for a more marginal decline in first time claims to 383,000. Continuing claims however, missed forecasts when it contracted to 3,721 million claims instead of 3.693 million.

The week ends with the US revisions to its 4th quarter GDP, which is expected to be revised up from previous estimate 2.8% growth to 3.0%. An upward revision on economic growth could see the Dollar advance as the outlook on the nation's recover improves. This will be accompanied with revisions to Personal Consumption for the same period which is forecasted to remain unchanged, since preliminary figures were released. Lastly economists expect the University of Michigan's Consumer Confidence survey to come in slightly lower at 68.0 in March, down from the previous reading of 68.2. This afternoon will also see a number of Federal Reserve officials making public addresses, the most notable of which being Lockhart's speech in Florida on the economy and Plosser's commentary on monetary policy in New York. Should comments from the Fed officials provide a positive outlook for the world's top economy then the Dollar could gather strength against the majors, although given the UK's waning rate hike expectations and the uncertainty over the outcome of the EU Summit, the Dollar may not need the support see gains today.

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