Foreign Exchange Market Overview

Thu, April 21, 2011

The Bank of England's Minutes to their April policy meeting provided the only item of interest from the UK yesterday. The minutes didn't reveal anything that wasn't already expected, with six out of the nine members of the MPC choosing to keep monetary policy unchanged, while the remaining three members; Andrew Sentence, Spencer Dale and Martin Weale all pushing for an interest rate hike. Just as in March, Andrew Sentence remained the more extreme of the MPC hawks, voting for a 50 basis-point increase instead of the 25 point increase asked by Dale and Weale. At the earliest traders are pricing in a rate hike for august, as many economist believe that tightening monetary policy any earlier could kill off the UK's recovery before it has fully gotten underway. This pushed the Pound to trade lower, at least initially, against the Dollar to hit a low of 1.6306, while against the Euro the news kept the exchange rate below 1.1320.

Public sector borrowing and retail sales figures for March make up the economic docket from the UK this morning. Forecasts call for the UK government to have increased its borrowing from £10.3 billion in February to £18.7 billion in March. Retails sales figures for March, excluding receipts of fuel sales (which have dropped as fuel costs have risen), are likely to push the Pound lower today, as the annualised growth rate is set to slip from 1.3% to 1.0%, with sales expected to fall by 0.5% month-on-month.

Yesterday the Euro recovered some of its strength as fears over sovereign debt began to recede. This change was brought on by the successful auction of Spanish bonds, with Madrid managing to sell €3.4 billion in debt due to mature in 2021 and 2024. Interest rate hike expectations also aided in keeping the single-currency trading higher against the Dollar, despite Germany's Producer Price Index for March coming in below expectations, with an annualised inflation rate of 6.2%. Still with inflation on the increase, ECB Executive Board member Lorenzo Bini Smaghi said that, "Now the economy is picking up, so the kind of interest levels that we had decided two years ago are really not appropriate any more."

Germany's IFO business sentiment gauges headline the European economic calendar today. Forecasts call for sentiment to have fallen in April across the three individual reports, the overall business climate index is expected to slip from 111.1 to 110.5, while the gauge for future expectations, which forecasts economic conditions as seen by firms over the next 6 months, is set to fall 1 point from 106.5 to 105.5. With each of the readings remaining firmly above the 100 point baseline, the outlook for the German economic is still a positive one.

With markets traders increasing their appetite for riskier assets, the US Dollar was largely weaker against the other major currencies. The shift in risk sentiment was brought on by a number of major corporations having reported strong profits and raising the forecasts for future growth. With market participants expecting to see the interest rate gap between the US and the Euro-zone widen, the Euro will be generally stronger on days when confidence in the global market is higher. As a result, the Dollar fell against the Euro to set the day's exchange rate high of 1.4538. On the data front, the economic docket showed that existing home sales rose far than expected in March. According to the report released by National Association of Realtors (NAR), existing homes sales increased by 3.7%, bringing the annual rate of sales to 5.10 million units. The increase follows February's contraction in home sales of 8.9%, and economists had expected that sales would increase by 2.5%. While the data provided a positive outlook for the US housing market, which has been one of the more troubled sectors of the US economy, it was not considered an indication for a robust recovery and as such failed to carry the Dollar to a rally.

Data on the US housing market continues today, with the release of February's House Price Index scheduled for this afternoon. The consensus calls for house prices to maintain its 0.3% decline from the previous month, an outcome that could weigh on the Dollar. Further selling pressure could be placed on the Dollar as the Philadelphia Fed's manufacturing index is expected to show that the pace of manufacturing activity with the Philly Fed district slowed in April from March's reading of 43.4 to 36.8.

Data Releases