Foreign Exchange Market Overview

Mon, April 18, 2011

After suffering a move to the downside, in the early part of the week, the Pound finished the week largely unchanged versus both the Dollar and the Euro. On Monday the Independent Commission on Banking (ICB) published its interim report on UK banks, suggesting that the retail arms of banks are ring-fenced, but did not go so far as to suggest separating the retail and investment unit. Tuesday's Consumer Price Index (CPI) lead the Pound lower when it was revealed that inflation slowed to 4.0% in March, thus making the chances of the Bank of England raising interest rates in May unlikely. The exchange rate began to pick up again on Wednesday as employment reached its highest level in two years when the ILO unemployment rate fell to 7.8% from 8.0% in February.

In the run up to the Easter weekend, economic figures are going to be thin on the ground for the UK with the Bank of England releasing the minutes to their April policy meeting on Wednesday. Traders will be interested in whether or not the 6-3 split in the MPC votes, for maintaining the 0.50% interest rate level, was held. Public sector finances will also be released on Wednesday with expectations for borrowing to pick up in March, and the week's data will conclude on Thursday with retails sales expected to have slowed over the same period. With higher public sector borrowing and a slowdown in consumer spending, the Pound could be set for downward trend.

Europe's debt woes came back to the attention of traders this week, with German Finance Minister Wolfgang Schaeuble saying that it's 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." Friday's Euro-zone CPI rose in March, with annualized inflation hitting 2.7% up from 2.6%. With inflation looking to continue rising despite the ECB lifting the benchmark lending rate of its historic low, earlier this month, the ECB may have to consider another rate hike, but such a move could have repercussions for the periphery nations.

This Tuesday, April's Purchasing Manager Index (PMI) will provide insight into the health of the European economy. Forecasts call for manufacturing and services activity to slow in both Germany and the Euro-zone as a whole, but with the readings still residing above the 50 point base line, growth is still evident. Then Wednesday will see producer prices in Germany advance in March, to add further pressure for another rate hike by the ECB. The final significant figures for Europe will be Germany's IFO surveys for April, which have been forecast to show that investor sentiment has slipped in Germany since March.

Despite a few hiccups, last week's round of US economic data pointed towards improved economic conditions and with it, a growing shift within the Federal Open Market Committee towards tightening monetary policy. The Fed's Beige book report set the tone for improvements in the US economy with the report saying that in most of the 12 districts labour market conditions were improving and consumer spending was on the increase, while manufacturing activity lead the economic gains. Further to this, commentary from two Fed officials, that being Kansas City Fed President Hoenig and Richmond Fed President Lacker, voiced support for withdrawing stimulus. Hoenig said delaying rate hikes could cause inflation volatility going forward, and suggested that the benchmark lending rate should be lifted to 1% and held there. Lacker simply voiced his opinion that the Fed has been too slow to withdraw fiscal stimulus. Ultimately the real driving force behind a Fed rate hike will be inflation, as was seen on Friday; CPI hit 2.7% for the year through to March, applying substantial pressure on the Fed.

Housing market data will feature heavily in this week's round of US figures. Building permits and Housing Starts for March are expected to pick up when figures cross the wire on Tuesday, and Wednesday's existing home sales are expected to provide an improved outlook with a 2.5% increase in sales over the same period. However Thursday's house price index is expected to show that prices have dropped in March by 0.2%. Overall, an improvement in the US housing market should see the Dollar make same gains this week.

Data Releases