Foreign Exchange Market Overview

Wed, April 20, 2011

The Pound pared yesterday's declines to see the currency reclaim a trading range that held above 1.63 against the US Dollar and hold above 1.1360 against the Euro, as risk appetite began to seep back into the market. Economists anticipate that the Pound will hold a narrow range leading up to the release of the Minutes to the Bank of England's last policy meeting, which is due to be published at 09:30 BST. While it is highly likely that the minutes will show that the MPC vote remained unchanged when deciding to maintain the current monetary policy, a surprise revelation that the sentiment among policy makers is shifting towards tightening monetary policy could spark an upward movement on the Pound. However, given that last week's Consumer Price Index showed the inflation fell in March, it's not likely that such a shift in policy stance is going to take place.

Against the US Dollar, the Euro managed to make a reversal on Monday's declines, as manufacturing activity across Germany and the Euro-zone expanded at a faster than expected pace in April, while services based industries slowed over the same period. The Composite PMI also advanced from a reading of 57.6 in March to 57.8 in April, with the positive outcome helping to push the EUR/USD exchange rate to a high of 1.4328.

This morning's headline figure for the European economic docket; Germany's Producer Price Index for March, reported an unexpected slow down in price growth as the annualised inflation rate fell from February's 6.4% reading to 6.2%, instead of rising by an equal margin to 6.6% as was forecast by economists. The outcome may actually help the Euro-zone out, as an easing in price pressure could mean the ECB can hold off on further rate hikes which have the potential to damage the weaker periphery nations and prevent them from achieving a sustainable recovery.

During the US trading session, news crossed the wires that in March both Housing starts and Building Permits were up following declines reported in February. Housing starts rose by 7.2%, falling short of the expected 8.6%, bring the annual figure up from 512,000 units to 549,000. Building Permits, which acts as a gauge for future housing developments, rose by 11.2% beating the forecasted 1.1% increase and raising the total number of permits issued this year to 594,000 from 534,000. The data provided a much needed improved outlook for the US housing market which saw the Dollar appreciate against both the Pound and the Euro, however the gains were short lived and the currency markets moved back.

Further housing data will be seen today when existing home sales figures for March are released. Economists expect existing home sales to pick up 2.5% following February's shocking 9.6% drop in sales. The outcome should prompt a reversal in the Dollar's recent declines, although it could a brief reversal given that yesterday's housing starts and building permits didn't affect a long lasting rally in the Dollar.

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