Foreign Exchange Market Overview

Mon, April 04, 2011

The Pound managed to close the week higher against the US Dollar. Some of the currency's gains can attributed to an improvement in lending conditions, as Tuesday's docket showed that mortgage approvals were up in February and consumer credit surprised economists with an rise in credit, beating expectations for a decline. Rising house prices also supported the Pound as on Thursday the Nationwide House Price survey saw the value of homes grow by 0.5% in March. The big figure of the week was perhaps the final revision's to last year's 4th Quarter GDP figure which was revised from -0.6% to -0.5%, but did little to challenge weakened sentiment hat has been in place since the preliminary figures were released. Friday brought less encouraging news, as manufacturing activity in March fell from 61.5 to 57.1, falling short of expectations for a smaller drop to 60.9.

Lying ahead is a very light week of economic data which starts with March's construction Purchasing Manager Index, which is expected to show that the pace of growth has slowed since February. Then on Wednesday the National Institute of Economic and Social Research (NIESR) is scheduled to release its estimates for the year's 1st quarter GDP, and finally Thursday will see the Bank of England announce their interest rate decision, which is expected to remain unchanged given that the minutes of their last meeting showed that policy makers were willing to wait and see how inflation plays out.

The Euro put in a strong performance last week. This is despite some very noticeable issues in the region's financial institutions. On Tuesday the Bank of Portugal lowered its growth forecasts for the year, following the collapse of the Portuguese government at the end of the previous week, while Standard & Poor's downgraded the nation's sovereign credit rating for the second time in 4 days from A-3 to BBB-, and Greece also suffered a credit downgrade to BB-. Portugal also missed its 2010 budget deficit target and pressure to accept financial aid increased as a result. Attention then turned to Ireland as the nation's banks underwent stress tests on Friday, which revealed that an additional €24 million of capital is required for the banks to survive. This in turn lead to yet another downgrade by Standard & Poor's who lowered Ireland's credit rating by one notch to BBB+ from A-. Yet despite all this the single currency managed to peak at 1.41 against the Dollar and for the GBP/EUR rate to fall to a weekly low of 1.1287. This indicates that Euro trader's are mainly focused on rate hike expectations.

For Europe the coming week will be as equally light as the UK's in terms of the volume of economic data. However two important events are due to take place this week. The first will occur on Wednesday when the final revisions to last year's 4th quarter GDP are announced, this is set to confirm the European economy grew by 2.0% annually. Lastly on Thursday, the sole reason for the Euro's resilience, the widely anticipated 0.25% rate hike, will come to fruition. Despite underlying issues with sovereign debt and weakness in its financial institutions, it is this singular event that has bolstered the Euro, and while it is almost a certainty that the ECB will raise rates, the possibility of the governing council maintaining its current policy still exists. Should such an event take place, then the Euro will be placed under tremendous pressure as market participants will be unable to ignore the problems that have dogged the region for two years now.

Despite a week of encouraging economic the US Dollar ended the week down against the other majors, with the EUR/USD breaking back above 1.42 and GBP/USD making a similar push above 1.60. On Monday, data released by the Commerce Department showed that consumer spending rose to its fastest pace of growth for four months with a 0.7% increase. On Wednesday the first batch of employment data, the Challenger Jobs Cuts report, showed that there was a 18% drop in the number of job cuts in March, while the ADP employment change survey recorded an increase of 201,000 private sector jobs, and both point towards steady jobs growth. The improvement in the US labour market was then confirmed by Friday's highly anticipated Non-farm Payrolls (NFP) survey which showed that in March the economy added 216,000 jobs, a higher outcome than the 190,000 consensus. The increase in jobs also meant that the unemployment rate fell from 8.9% to 8.8%. Ultimately this proved to be the catalyst for a rapid selling bid on the Dollar, as the data stoked an improvement in risk appetite amongst traders and consequently there was shift away from the "safe haven" Dollar to higher yielding currencies. 

In comparison the week ahead will much quieter. Indeed the only significant data release scheduled for the US will be the release of the minutes the the Fed's March policy meeting. Trader's will look to the minutes for clues on future policy direction and to garner an overview of the Fed's outlook on domestic and foreign economic conditions. Any talk of reigning in the QE2 program before its deadline or raising interest rates later in the year could stoke a rally in the Dollar. Equally any indication for extending the quantitative easing program could weigh on the Dollar. Elsewhere the week will be littered with several public addresses form leading Federal reserve officials. Just like the minutes, traders will look out for commentary that is supportive of the US economy, which in turn will prop up the Dollar against the other major currencies.

Data Releases