Foreign Exchange Market Overview

Tue, April 19, 2011

The Pound managed to rally against the Euro, while versus the US Dollar, the exchange rate managed to slip back towards 1.61, despite the economic docket lacking anything in the way of a potential driver for price action. The Pound fell against the Dollar the market prepares itself for Wednesday's release the minutes to the Bank of England's last policy meeting, which is expected to reveal that there has been no change in the MPC's vote. This in turn pushes back forecasts for a rate hike, which is now predicted to take place towards the end of the year. Further to this the Ernst & Young Item Club (EYIC), which is an economic forecaster, has asked for the Bank of England to hold off raising interest rates until November, as a rate hike before November could spark a wage-price spiral and strain household incomes as mortgage payments rise.

The Euro weakened on Monday as sovereign debt fears weighed on the single currency. This follows comments from Greece's Finance Minister George Papaconstantinou, who said that Greece would be seeking to restructure its debt, despite the IMF stating over the weekend that Athens should consider restructuring its debt next year. To further compound the Euro's woes, Moody's Investor Services downgraded several Irish banks to junk status including the Bank of Ireland and Allied Irish Banks. ECB officials didn't help the situation either, as they down played speculation for further interest rate hikes in the first half of this year. ECB board member Michael Bonello warned that higher interest rates would, "make it more difficult for countries to grow out of their debt problem".

This morning's German PMI readings provided a mixed outlook for Europe's leading economy. Manufacturing activity picked up in April as the PMI reading rose from March's final figure of 60.9 to 61.7, beating estimates for a reading of 60.0. Service based activity slowed, with the PMI reading slipping to 57.7 missing forecasts for a more mild drop to 59.8. The euro-zone gauges were equally mixed, as the services index fell in-line with expectations to 56.9, while manufacturing picked up from 57.5 to 57.7. Despite the lower than expected performance in the services sector, the Euro strengthened off the back of the economic data to see early morning gains against both the Pound and the Dollar.

Dollar price volatility ensued yesterday when credit ratings agency Standard and Poor's (S&P) announced that it was cutting its ratings outlook for the US from stable to negative. While the agency did not revise the nation's AAA credit rating, it did lower its long-term rating as the agency was worried that US policy makers would not be able to reach an agreement on how to address its budgetary challenges. Initial reactions saw the US Dollar take a sharp downward turn versus the Pound and provide the Euro's decline with brief period of respite. This was then followed by the biggest rally the currency has seen since January 5th this year, a risk aversion set in and traders sought the Dollar for its "safe haven" status.

Housing starts and building permits for March could help the Dollar gain some ground today, as analysts forecast for new home builds to increase by 41,000 and for an additional 6,000 building permits to be issues. The consensus readings would suggest a turn around in the condition of the US housing market, which has dogged the economy for some time now, and a positive outcome could see the Dollar appreciate.

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