Foreign Exchange Market Overview

Thu, April 14, 2011

UK employment data headlined the European economic calendar yesterday, which revealed that jobless claims in March marginally increased as changes to benefit rules meant that some single parents had to file claims for jobless benefits instead of income support. As a result the UK economy saw an additional 700 claimants for jobless benefits instead declining by 3,000. At the same time the claimant count rate remained unchanged at 4.5% over the same period, matching economic forecasts. However the IFO Unemployment Rate fell in the 3-months to February to 7.8%, beating estimates for unemployment to remain steady at 8.0%. Finally the late night release of Nationwide's consumer confidence index showed the sentiment improved in March to a reading of 44 up from 39.0, and the outcome lent some support to the Pound, with GBP/USD pushing back up to levels near 1.6360 and GBP/EUR to climb to 1.1280.

With nothing scheduled for released from the UK today, the Pound's movements will be determined by international concerns, namely the outcome of the restructuring plan for Spain's small banks (which will be discussed later) and interest rate hike expectations in the US.

The Euro continued to press its advance against both the US Dollar and the Pound yesterday, as market traders expect to see further interest rate hikes over the year, an opinion that was supported by rising consumer prices in France and higher wholesale prices in Germany, that were reported at the start of the European session. Industrial production for the region grew at a much slower pace than expected, with industrial output in February slowing to 0.4% growth instead of the 0.8% forecast, signalling that sluggish growth may lie ahead for the region. Still the currency held a range close to 1.45 against the US Dollar.

In today's European session the ECB's monthly report will be the only note worthy event. Similar to the US Fed's Beige Book (see below) the report provides insight into the state of the European economy as seen by the central bank, and in which direction future policy may lie. Should the report paint the Euro-zone economy in a positive light and hint towards further interest rate hikes then the Euro will pushed further along its upward trend. The only other significant event will be the deadline for approving a restructuring plan for Spain's "cajas" (small savings banks). Since the cajas account for about half of Spain's banking sector, traders will want to know how much additional capital will be required to close the funding gaps, as this will indicate whether or not Spain can sort out the restructuring without having to turn to the EU for aid. Should it be revealed that Spain will require a bailout, then the Euro is likely to take a hit and trade lower against the major currencies.

Retail sales in the US slowed in March from February's upwardly revised 1.1% to just 0.4%, missing forecasts for an increase of 0.5%. This makes February the ninth consecutive month for rising sales. The Dollar was given some support when President Barrack Obama proposed a budget plan that would see $4 trillion in deficits cut over a 12 year period. The Federal Reserve's Beige Book report, which was released at 19:00 BST, showed that since the previous report was released, economic activity generally continued to improve across the twelve Federal Reserve Districts. The Fed's book reported that in most districts labour market conditions were improving and consumer spending was on the increase, while manufacturing activity lead the economic gains. The Book's positive tone lends weight to arguments by Fed policy makers who are seeking to tighten monetary policy. Overall the docket aided in the EUR/USD falling back towards of a low of 1.4314.

Looking ahead March's Producer Price Index headlines the economic calendar for the day, with producer prices expected to advance to 6.4% annually from the previous month's reading of 5.6%. As inflation gathers pace, the Fed may have to reconsider maintain the extraordinarily loose fiscal policy and look to increase interest rates to curb inflation. Jobless claims are also scheduled for today, with the market consensus calling for both continuing and initial claims to slip from the previous week's levels, indicating steady but slow improvements in the US labour market and echoing statements made in the Beige Book.

Data Releases