Foreign Exchange Market Overview

Fri, April 15, 2011

With nothing on the economic calendar to motivate price direction, the British Pound was left at the whim of macro-economic conditions. As a result the Pound saw gains against the Euro with the currency pair setting the day's high at 1.1351, before falling back slightly part way through the US session. Against the US dollar the Pound was largely up as the exchange rate peaked at 1.6380 before slipping back down and holding steady above 1.63. Friday will be no different, once again leaving the Pound subject to far reaching influences.

The Euro took a hit against the US Dollar during yesterday's European session, as news reached markets that certain political parties in Finland may vote to block the Euro-zone rescue package for Portugal, should they come to power after the Finnish Parliamentary elections take place on the 17th April. There are fears that should Finland block Portugal's bailout, then the dissent amongst German people towards further bailouts may grow, causing havoc within European bond markets. Finland is unique within the EU in that it is the only nation where bailout loans by the European Financial Stability Fund (EFSF) have to be approved by Parliament. The ECB's Monthly Bulletin was also released in the early part of the European session, but failed to stoke any upward movement in the Euro, as it merely reiterated recent comment from ECB President Jean-Claude Trichet that monetary policy will be normalised "when appropriate" and that "risks to the economic outlook remain broadly balanced in an environment of elevated uncertainty." The news lead the EUR/USD exchange rate to a low of 1.4365 before rebounding back towards 1.45 by the middle of the US session. Elsewhere the Bank of Spain (BoS) approved all capital raising plans put forward by the country's banks. Spain's savings banks, known as "cajas", are undergoing a massive state-driven restructuring, in an effort to reassure financial markets on the stability of the banking system, which is seen as potential trigger for a fiscal crisis that would force Spain to seek a bailout, like other member-states before it. Analysts disagree on the exact amount of capital that will be needed to close the funding gap in the financial system, but estimates do go as high as €120 billion.

Today's Euro-zone Consumer Price Index (CPI) could see the Euro make gains against the other currencies as month-on-month CPI is expected to gather pace to 1.3% in March up from 0.4% a month prior, while the annualized inflation rate is set to remain stable at 2.6%. However core CPI has been forecast to rise from 1.0% to 1.1% annually. Rising inflation translates into another possible rate hike by the ECB in May, and as seen recently the Euro has remain resilient despite sovereign debt fears which the currency owes to rate hike expectations. Further to this the Euro-zone trade balance deficit is expected to have shrunk in February, according to figures due for release. Economists expect the trade deficit to narrow from €14.8 billion to €4.0 billion.

Producer Prices in the US grew at a slower than expected pace, during the month of March. Economists had expected prices to advance 1.0%, but due to a fall in food prices, producer prices only grew by 0.7% month-on-month. Core prices came in higher than expected with a growth rate of 0.3% instead of remaining steady at 0.2%. The increase in core prices is unlikely to stoke the Fed into an interest rate hike, as the central bank remains committed to loose monetary policy. Initial jobless claims made a surprise increase last week with applications for benefits up by 27,000 to 412,000 for the week to 9 April.

On the docket today, Consumer Prices in the US are expected to hit a 14-month high of 2.6% in March, with core CPI expected to yield a far more modest increase to 1.2% from 1.1%. Like yesterday's increase in PPI, the outcome is unlikely to raise interest rate expectations as a number of Federal Open Market Committee members have already dismissed energy-driven rises in prices as a reason to tighten fiscal policy. Moving away from inflation, industrial production is expected to gather pace in March, reaching a growth rate of 0.6%, marking the strongest gains to be seen in 3 months. Lastly the University of Michigan's consumer confidence survey is expected to show the sentiment improved in April after March recorded a 16-month low.

Data Releases