Foreign Exchange Market Overview

Wed, April 13, 2011

Interest Rate expectations began to subside yesterday, following slower than expected consumer price growth in March. Annualized CPI was at 4.0% in March compared to the 4.4% CPI reading in February, while core inflation slipped from 3.4% to 3.2%. With inflation having cooled, traders now expect the Bank of England to maintain the current policy through May, however even though inflation came in lower than expected, the current rate of price growth is still well above the BoE's 2% target, meaning a rate hike may be on the cards at the end of the 2nd quarter or well into the 3rd. As a result of the news the Pound slipped against the Dollar to touch a low of 1.6225 and against the Euro the currency fell back to 1.1216.

Employment data is the theme for UK figures today, with the headline Jobless Claims Change figure expected to show that jobless claims fell in March by 3,000 claimants. The predicted outcome is a considerable slow-down on jobs growth compared to February's 10,200 drop in claims. The Claimant Count Rate, which is the percentage change in jobless claims, is set to remain unchanged at 4.5%, while ILO unemployment rate is also expected to remain steady at 8.0% from January to February. Average weekly earnings are set to advance 2.6% in February compared to the same time last year. With the employment situation looking relatively unchanged, Pound could well lose ground against the other majors, as a lack of jobs growth suggests that economic conditions are still fragile.

The Euro continued to advance on the US Dollar pushing to a 15 month high of 1.4518. This was despite economic figures showing that sentiment towards the German economy deteriorated at a much faster pace than was expected as sentiment index by market researcher ZEW fell from March's reading of 14.1 to 7.6 in April. The outcome had little impact on the Euro's standing against the other majors, as the Pound continued to loose ground against the single currency. Off the docket European Central Bank Executive Board member Juergen Stark said, "The ECB will adjust its policy interest rates...at a pace and to a degree commensurate with the evolution of risks to price stability." Stark's comments indicate that the ECB has begun a course of gradually tightening policy, even though ECB President Jean-Claude Trichet said last week's rate increase wasn't necessarily the start of a series. As markets speculate the ECB to carry out further interest rate hikes this year the Euro could gather further strength.

So far this morning French CPI readings and German Wholesale Prices for March, beat analyst expectations, with prices growing at a faster-than-expected pace. The figures, while not majorly influential on the currency market, add further weight to any arguments for the ECB to raise interest rates again, and thus is ultimately supportive of the Euro. Today's industrial production figures, however, have more potential to extend the Euro's recent gains, as production in February is expected to advance 0.8% up from 0.3% in January.

Much of the Euro's gains against the Dollar during yesterday's trading session can be attributed to the March's trade balance deficit, which narrowed by a smaller than expected margin. According to figures released by the Department of Commerce the trade deficit narrowed to $45.8 billion in February from a revised $47 billion in January, while economists had expected the deficit to narrow to $44 billion. Although the trade deficit fell, there was a drop in both imports and exports, signalling weaker global demand. With global trade remaining subdued the Federal Reserve is expected to keep interest rates at near zero levels in a bid to support the economy.

Looking over today's US session, the expected slow down in retail sales over March could weigh on the Dollar, as economists expect sales to slow from February's 1.00% growth rate to just 0.5%. A slow down in retail sales is indicative of weakened consumer sentiment, and Fed Chairman Ben Bernanke, has stated that until consumer spending, along with an improved recovery within the labour market, have reached satisfactory levels the Fed will refrain from tightening fiscal policy. The Fed's beige book, which is an economic survey of conditions in each of the Federal Reserve Districts, could provide the Dollar with some buoyancy if the anecdotal data that it provides suggest that conditions are improving.

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