Foreign Exchange Market Overview

Mon, April 11, 2011

Overall the Pound rose against the US Dollar over the course of last week, this was despite a few indications from economic data that the UK might still be struggling following the economy's contraction in the 4th quarter of last year. On Wednesday industrial and manufacturing production figures for February were less than impressive, with industrial production contracting 1.2% and manufacturing failing to move in either direction. The figures contradict the more timely PMI readings for manufacturing which were released earlier in the week and beat analyst expectations for growth. Equally the National Institute for Economic and Social Research (NIESR) announced that they estimated the UK economy to have grown by 0.7% in March, a step up from the 0.1% growth rate estimated for February. The big news of the week was the Bank of England's interest rate decision, and as predicted the MPC maintained the current policy, holding rates at 0.5% and maintaining the stock of asset purchases at £200 billion. The MPC also refrained from releasing an accompanying policy statement, meaning traders must wait until the 20th April for the meeting's minutes to be released for any insight into the MPC's future direction on policy. The MPC should consider Friday's PPI figures when looking at the possibility of adjusting monetary policy in May, which showed that inflation grew to its highest level since 2008.

Keeping with inflation, on Tuesday March's consumer price index is expected to show that prices maintained a growth rate of 4.4% since February. Similarly retail prices are set to maintain a growth rate of 5.5% over the same period. With inflation looking to persist at elevated levels, the arguments put forth by MPC hawks, such Andrew Sentence, for tightening monetary policy are given increased weight. Come Thursday the UK will be releasing employment figures for March with the claimant count rate forecasted to remain at 4.5% and February's ILO unemployment rate holding at 8.0%.

The Euro extended it's gains against both the Dollar and the Pound at the end of last week. The currency got a major boost following the highly anticipated 0.25% increase in the interest rate, putting the benchmark lending rate at 1.25% and marking the first rate hike in just over two years. The increase in the interest rate will help alleviate inflation, which currently resides above the ECB's 2% target, however it will likely damage the periphery european economies struggling with spiraling debt. A prime example is Portugal, who on Wednesday night, became the third European nation to request a bailout from the EU. With underlying sovereign debt risk still permeating throughout Europe, the Euro is likely to face increasing headwinds as the EU takes a lackluster approach to addressing the uneven recovery in the region.

Another light week of economic data lies ahead for the Euro-zone this week. On Tuesday market researcher ZEW is scheduled to release its economic confidence surveys for both Germany and the Euro-zone. On Wednesday the region's industrial production is expected to have grown by 0.8% in February improving on January's 0.3% growth rate to provide an improved outlook for the region. Then on Thursday the ECB will be publishing it's Monthly Report for April, providing market traders with the central bank's view on the economic development of the region. Lastly the week will end with Euro-zone consumer prices, which for March are expected to hold steady at 2.6% annual growth.

With a very light round of economic data last week, the US Dollar fell back against the major currencies with both the EUR/USD and GBP/USD pushing up to 16-month highs. Several statements from number of Fed Officials and the minutes to the FOMC's (Federal Open Market Committee) latest meeting showed that the US central bank is still committed to fully carrying out its quantitative easing program, but that there is divide amongst policy makers over whether to remove the $600 billion stimulus package before it is due to be completed in June. According to the minutes, "A few participants indicated that economic conditions might warrant a move toward less-accommodative monetary policy this year; a few others noted that exceptional policy accommodation could be appropriate beyond 2011." This suggests that the Fed may begin to tighten its monetary policy as the pace of recovery gathers, which could lead to an increase in risk appetite amongst traders which in turn could see the Dollar trade lower. Equally though it also suggests that if the recovery slows then the QE program could be extended. Further to this US Treasury Secretary Tim Geithner warned that the US will reach its borrowing limit by mid-May unless lawmakers resolve a stand-off over budget cuts. If an agreement is not reached, it would result in the suspension of government services, such as social security payments, which is known as a government shutdown.

This week retail sales figures on Wednesday are expected to show that sales growth slowed in March from February's 1.0% increase to just 0.5%. The data would suggest that consumers are still cautious about economic conditions and this translates into an unwillingness to increase spending. Inflationary data will add pressure on the Fed to raise interest rates as on Thursday producer prices are expected to grow annually by 6.4%, and Friday's consumer price index is forecast to see a 2.6% increase. However if, as mentioned previously, the US government fail to agree on a budget and the government shuts down, then economic figures will dry up as official departments close, leaving the Dollar to sink lower.

Data Releases