Foreign Exchange Market Overview

Fri, April 01, 2011

The Pound slipped against the major currencies ahead of the open of the US session, falling from the day's high of 1.6151 and 1.1392 against the Dollar and Euro respectively, as the economic docket reinforced a weakened outlook for the UK economy. The GfK consumer confidence index showed that consumer sentiment in March remained at -28 for second consecutive month, marking the lowest reading since 2009. Further to this, commentary from Nationwide's Chief Economist, Robert Gardner following an unexpected rise in the building society's house price index, dampened the outlook for the housing sector as the economist foresaw that the UK's sluggish recovery would see housing prices "moving sideways or modestly lower through 2011". The report also showed that with 62% of mortgages being on variable rates, an increase in the benchmark lending rate by the Bank of England would squeeze household incomes as mortgage payments rise in-line with interest rates.

The week ends on a quiet note with March's Purchasing Manager Index for the manufacturing sector being the only figure scheduled from the UK today. Forecasts call for manufacturing activity to drop in March, with the index predicted to slip from February's reading of 61.5 down to 60.9.

The Euro advanced against the other major currencies following the news that Euro-zone Consumer prices increased at an annualized rate of 2.6% in March, marking the fastest pace of increase since October 2008 and beating forecasts for inflation to hold steady at 2.4%. The unexpected rise in inflation strengthened the case for the ECB to raise interest rates in April, and according to Jonathan Loynes at Capital Economics, next month's rate increase won't be a one off. Rate hike expectations seem to be the real power behind the Euro's resilience despite the very real threat of sovereign debt, which has been highlighted by Standard & Poor's downgrade of four Greek and Portuguese banks after both nations received downgrades on Tuesday, and yesterday's stress tests on Ireland's major banks revealed that an additional €24 billion was needed on top of the €46 billion the Irish government had previously committed, to support its failing banks.

Purchasing Manager Indexes for the manufacturing sector will make up the bulk of European figures today. The finalised figures for March were expected to confirm that that Germany's manufacturing PMI came in at 60.9, while the Euro-zone index is expected to read at 57.7 down from February's reading of 59. However, while the German PMI came inline with expectations, French and Italian readings, which were released earlier, came in below preliminary readings, resulting in the Euro-zone PMI coming in lower at 57.5. All indexes still read above the 50 point baseline for growth, indicating that manufacturing within the Euro-region is still going strong.

According to figures released by the Commerce Department, new orders for US manufactured goods unexpectedly fell in the month of February by 0.1%, after the figure had previously reported 3 consecutive months of growth. The decline in factory orders surprised economists who had forecasted an increase of 0.5% compared to January's originally reported increase of 3.1%. Elsewhere ongoing jobless claims fell in the week ending on the 19th March from 3.765 million to 3.714 million, but failed to hit the consensus reading of 3.705 million claims, while initial claims made a similar decline to 388,000 claimants from 394,000.

Today's headline figure is the highly anticipated US Non-farm payrolls figure for March with expectations calling for payrolls to increase by 190,000 in March, a slight slowdown in the rate of jobs creation as compared to the previous month's figure of 192,000. Private sector jobs are expected to increase by 208,000 over the same period, but like the non-farm figure, this is a smaller increase than in the previous month. This increase in jobs is expected to leave the unemployment rate unchanged at 8.9%, but with the average hourly earnings expected to grow at an annualized rate of 1.9% the overall picture is for a gradually improving labour market.

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