Foreign Exchange Market Overview

Thu, April 07, 2011

After an initial move to the downside, following Wednesday morning's announcement for poor industrial and manufacturing production in February, the British Pound strengthened following the results of the NIESR (The National Institute for Economic and Social Research) GDP estimates for March. The NIESR estimated that in March the UK economy grew by 0.7%, a fairly significant improvement on February's downwardly revised 0.1% growth rate. This ties in with the better-than-expected PMI readings for both the Services and Construction based sectors, which were released earlier this week. The data lead the Pound to retrace its decline against the Dollar, moving up from the daily low of 1.6257 up to levels above 1.63.

The Bank of England Interest rate decision is to be announced today at 12:00 BST, with expectations calling for the MPC (Monetary Policy Committee) to continue with the current monetary policy for the time being, as the Minutes to the March policy meeting showed that the majority of the MPC were prepared to wait and see how inflation would pan before raising interest rates. This is despite the central bank's own forecasts for inflation to hit 5% later this year. Should the BoE decide to surprise markets with a rate hike, then we can expect to see the Pound rally as a significant shift in policy stance has taken place within the MPC.

The Euro benefitted yesterday from an improved economic outlook provided by a supportive round of economic data. Firstly the final revisions to the region's 4th quarter GDP growth rate were confirmed with the economy expanding at 2.0% annually, and by 0.3% quarter-on-quarter. Factory orders in Germany provided a further lift to the single currency, with orders growing by 2.4% in February, instead of slowing form 2.9% in January to 0.5% as economists had expected. The outcome merely highlight the huge disparity between Germany, the region's top performing economy, and the weaker periphery countries like Portugal, Ireland and Greece who are still struggling with their debt. Later last night, news broke out that Portugal will be seeking a bailout in order to support its economy; however no decision has been made on the extent of the bailout.

Today the ECB will announce their decision interest rate at 11:45 GMT. Economists fully expect the ECB to raise the minimum bid rate by 0.25%, to 1.25%. There is also some speculation that the central bank may even go so far as raising the rate by 0.5% to 1.50%, while the possibility also exists (although it seems highly unlikely) that the ECB will hold interests at their current level. Despite the outcome the decision will move the market. Should the ECB choose the later, expect the Euro to fall off sharply, while a 0.50% increase should see a significant rally, although such a decision could aggravate problems in periphery members and the Euro could suffer in the long-term. Finally the expected outcome, and most likely of the three, may provide only a slight rally in the Euro since this has already been priced in by the market.

On another quiet day for US economic figures, the Bank President of the Atlanta Federal Reserve, Dennis Lockhart said that he does not expect the central bank to tighten interest rates by the end of the year, due to the fact that the economic recovery is still fragile and inflation remains low. During the Atlanta FED conference at Stone Mountain, Georgia, Lockhart went on to tell reporters "I wouldn't rule it out entirely, but at this stage I personally am not leaning in the direction of thinking that [tightening monetary policy] is absolutely required."

In comparison to the highly anticipated ECB and BoE interest rate decisions, the US session will be relatively tame. Weekly jobless claims make up the US's contribution to the economic docket, and with both ongoing and initial claims expected to fall, the data will merely reinforce last Friday's impressive Non-farm payrolls figure which showed better than expected jobs growth, but the data may not provide much in the way of price action.

Data Releases