Foreign Exchange Market Overview

Fri, April 08, 2011

Yesterday at 12:00 BST, the Bank of England announced its interest rate decision for April, and as expected the central bank decided to hold their current policy, leaving the interest rate unchanged at 0.50% and retaining the stock of asset purchases at £200 billion. The market took a bearish reaction to the interest rate announcement, with GBP/USD dropping from the day's high of 1.6350 to to 1.6290 within a matter of minutes. As was expected the MPC refrained from releasing a policy statement, meaning traders will have to wait until the 20th of April for the Minutes to the meeting, to gauge the MPC's tone for future price direction. Given that the central bank itself has forecast that annualised inflation could reach 5% later this year, there is a good chance that the minutes could show that there has been a growing divide amongst MPC members towards raising interest rates. Off the docket, Moody's Investor Services said that it will be assessing how UK banks will fare without the government's support, and warned up to a total of 19 banks could suffer multiple downgrades on their senior debt ratings over the coming months.

Today the Producer Price index for March is expected to show that price growth has slowed since Febraury. The consensus calls for Output prices to slow from a rate of 5.3% to 5.1% annually, while core prices are expected to slip to 2.9% from 3.1%. The slowdown in price inflation could mean that the BoE's continued statements that the current levels of inflation are owed to temporary factors could prove to be true. If this is the case, then the need to raise interest rates in order to curb inflation could be muted.

As predicted the ECB decided to lift the bench mark interest rate off its historic low of 1.00% to 1.25%. This is the first interest rate hike to take place in about 3 years, and despite the increase in the rate, the Euro became very volatile and struggled to hold its ground, as fears over debt contagion, incited by Portugal's request for a bailout, over shadowed the region's need to reign in inflation. In his address, following the rate announcement, ECB President Jean-Claude Trichet said that inflation risks remained on the upside and the now current monetary policy would remain accomodative to the needs of the economy. Trichet hinted that further rate hikes could be on the cards when he stated that the central bank would do what is necessary to ensure price stability over the medium term. However the increase in borrowing cost could weigh heavily on the more debt ridden peripheral economies such as Greece, Ireland and now Portugal, and ultimately this could bring the single-currency lower, as the risk of contagion intensifies and the economic recovery suffers.

This morning Germany's trade and current account balances have already come out to round off the week's European data. According to official figures Germany's trade surplus rose in February to €12.1 billion from January's €10.1 billion, but the increase in the surplus fell short of the €13 billion forecast. The lower than expected increase is owed to a larger than expected increase in the nation's imports which unexpectedly increased by 3.7%, compared to the 2.7% increase in the value of exports. Likewise the current account surplus rose to €8.9 billion from January's downwardly revised €7.1 billion and missed estimates for a surplus of €12.0 billion. Despite the data falling short of the consensus the readings, the Euro appreciated slightly against both the Dollar and the British Pound.

Jobless claims in the US fell at the end of March according to figures released Thursday afternoon. Initial applicatns for jobless benefits fell by 10,000 to 382,000 individuals and the number of people receiving on-going benefits fell to 3.72 million from an upwardly revised figure of 3.73 million. The data provided an improved outlook for the US labour market recovery and supported last Friday's Non-farm payrolls figure which showed that the economy added 216,000 jobs in March. As a result GBP/USD was restricted from advancing past 1.63 after its initial sell off following the BoE rate decision, and the Euro slipped to a low of 1.4242 against the Dollar.

Friday is another quiet day for the US leaving market sentiment to hold sway over price action over the afternoon session.

Data Releases