Foreign Exchange Market Overview

Tue, April 05, 2011

The Pound maintained its recent rally against the US Dollar and held a narrow range throughout the trading day, peaking at a high of 1.6176 and never dipping below 1.61. Keeping the Pound buoyant was the better than expected Construction Purchasing Manager Index (PMI) which showed that construction activity only slowed marginally compared to economists' forecasts. However the figure did little to boost expectations for a rate hike this week when the Bank of England delivers its monetary policy decision for the month.

Today, the Halifax Plc. House Price index could support the Pound as month-on-month prices are expected to increase by 0.2% in March, following February's contraction of 0.9%. Later the Purchasing Manager Index is expected to show that service based activity remained stable with no change in February's reading of 52.6.

The Euro managed to hold a narrow, albeit choppy, range against the Dollar yesterday, with the exchange rate making a move towards a high last seen on 4th November 2010 when it peaked at 1.4267, before falling back towards 1.42. The Euro may continue to hold its own heading towards Thursday's interest rate decision as a Credit Suisse survey has shown investors are pricing in a 100% chance for a 25bp rate hike. On the data front Producer Prices for February advanced at an annualized pace of 6.6% following January's revised increase of 5.9%. The increase in prices was owed to rising energy prices. Howard Archer, Chief Economist at IHS Global Insight, said "The further spike up in Euro-zone producer prices in February will reinforce the ECB's concern that high energy and commodity prices are exerting serious inflationary pressures lower down the supply chain."

Today's final revisions to March's Purchasing Manager Indexes on services are due out for France, Germany and the Euro-zone. The French PMI was expected to confirm that activity rose to an eight-month high reading of 60.7, but this morning's release saw it revised down to 60.4. Germany's PMI confirmed that the service activity gathered pace and reached a two-month high of 60.1. According to preliminary estimates, service based activity in the Euro-zone rose at the fastest pace seen since August 2007 when the index moved up from 56.8 to 56.9, however today's final revisions actually improved on the preliminary figure with an upward revision to 57.2.

Amid a docket devoid of economic figures, the Fed President of Atlanta Dennis Lockhart; announced in a speech in West Palm, Florida, that with each successive quarter "the recovery is increasingly well established." However Lockhart saw some underlying issues that needed to be addressed, including consumer spending, which he said has, "been growing more slowly relative to income than it did before the recession," and added that he expects this behaviour to persist for some time. Fed Chairman Ben Bernanke also gave a speech yesterday on price stability, saying "We [the Fed] have to monitor inflation and inflation expectations extremely closely because if my assumptions prove not to be correct, then we would certainly have to respond to that and ensure that we maintain price stability." This hints that should the need arise, the Federal Reserve will take the necessary action to curb inflation i.e. increase the benchmark interest rate. The Dollar gained some ground against the Euro and Japanese Yen following the comments which echo the statements that Bernanke made in after last month's Federal Open Market committee (FOMC) meeting.

It will be another quiet session for the US this afternoon, with the ISM non-manufacturing index being the only economic figure due for release. The figure is expected to show that the services sector slowed its growth rate marginally since February, with the index slipping from 59.7 to 59.5. However the outcome may very well be over looked as the FOMC is scheduled to release the minutes to their last policy meeting. Traders will be interested in commentary over whether the Fed will carry out its QE2 program through to the end or phase it out sooner as the economic recovery gathers pace. Any suggestion that the Fed may reign in its quantitative easing program could spark a Dollar rally, and should the FOMC see scope to begin raising interest rates later in the year this will also likely produce the same effect.

Data Releases