Foreign Exchange Market Overview

Tue, April 12, 2011

Price action for the Pound was a little choppy yesterday, after the Independent Commission on Banking recommended that banks in the UK should hold more capital and to separate its retail banking into separately-capitalized subsidiaries. The aim of this would be to strengthen the retail banking sector and would also safe guard deposits for savers. Commentary from the Bank of England's Andrew Sentence, stating that he voted last week for a 50 bps increase in the interest rate, help push the Pound higher against the US Dollar, with the currency springing back from the pair's low of 1.6311. Sentence went onto say given that inflation is expected to reach 5% this year, he saw ample scope for a series of gradual increases, as inflation dampens the spending amongst households and businesses, with rates possibly reaching 2% by next year. Further to this Sentence added that "I'm not sure I'm swimming against the tide because the balance of opinion [within the MPC] has been shifting in that direction," meaning the minutes, which are scheduled for release on the 20th, could show another change in the vote on policy direction. Late last night, the British Retail Consortium released a report saying that retail sales fell 3.5% in the through to March, making this the worst decline since 1995.

Today's scheduled release of March's consumer price index could add further weigh to Mr. Sentence's views on monetary policy, as forecasts call for annualized consumer prices to remain elevated at 4.4%. A larger than expected increase in inflation could see the Pound rally, given that Sentence's comments hint a shift within the MPC towards tightening monetary policy. Retail prices will also lend support, with annualized retail prices expected to come in at 5.5% in March.

Sovereign debt fears weighed the Euro down, with the EUR/USD exchange rate slipping back to a low of 1.4421, as German Finance Minister Wolfgang Schaeuble said that its unclear whether Greece will need another cut in its bailout rate or extension of repayment terms. The German Finance Minister also spoke of Portugal, saying that Portugal "has to deliver sustainable measures for reducing the deficit." Yesterday's economic figures did nothing to help the Euro as both French and Italian industrial production slowed in February, highlighting the poor performance of many Euro-zone members compared to Germany.

Germany comes under the spotlight today, with Europe's top economy making up the majority of today's figures. Already today, the market has seen that consumer prices in Germany grew at an annualized pace of 2.3% in March. Price growth beat preliminary expectations for a 2.2% increase. Later the ZEW economic sentiment index is expected to show that confidence in the German economy has fallen with the index slipping from last month's reading of 14.1 to 11.3. This would mean that the index fell for the second consecutive month and making it the lowest reading in four months.

With nothing on Monday's docket to offer any support for the Dollar, the currency slipped lower against both the Euro and the Pound. Commentary from Federal Reserve Vice Chairman Janet Yellen, didn't help the Dollar either. The Chairman stated that the increase from food and fuel costs is, "unlikely to have persistent effects on consumer inflation or to derail the economic recovery and hence do not, in my view, warrant any substantial shift in the stance of monetary policy."

Looking over today's docket, the Dollar could see a slight reversal as February's trade balance deficit is expected to narrow from January's $46.3 billion to $44.0 billion, and likewise March's monthly budget statement deficit is also expected to narrow from $222.85 billion to $189.0 billion.

Data Releases