Foreign Exchange Market Overview

Tue, April 26, 2011

The Pound has been on a steady upward trend against the US Dollar over the past week. Ultimately this was owed more to a fundemental weakness in the Dollar itself rather than an appreciation in the Pound, but the positive economic figures, from what was a relatively quiet week in terms of risk events, did aid in pushing the currency pair higher. Thursday's announcement that retail sales in March advanced instead of contracting, as was anticipated by economists provided an improved outlook for the nation. Further to this the government's borrowing came in lower than was expected with the government taking £16.4 billion to finance its spending instead of £18.7 billion as was forecasted. On Wednesday the Bank of England published the minutes to their April meeting, and as was expected the division of votes on altering the central bank's monetary policy remained unchanged from March's meeting, where six of the nine policy makers votes to maintain the current policy and the remaining three opting for an interest rate hike.

For the UK another long weekend will mean economic data will be thin on the ground this week, but on Wednesday the GDP figures for the first quarter of the year are scheduled for release. This will provide the first true bit of insight into how the UK has faired since the economy contracted at the end of last year. Obviously an improvement on last quarter's 0.5% contraction will bolster the Pound, where as a continued or even steeper economic decline will spell disaster for the currency.

This week has seen the Euro continue to gather strength against both the Pound and against the US Dollar through most of last week. Initially the Euro faltered against the Dollar as the currency was hit by three separate sources. The first was the election of the True Finn party in Finland, who has openly against further EU bailouts and may move to block the Portuguese rescue package, following the collaspe of its government. The second was Greece's denial that it would have to restructure its debts following a newspaper article which stated that the nation asked the IMF to consider a restructure. Lastly Moody's downgraded its rating of Irish banks to junk status. However the failing confidence in the Euro-zone didn't last, as by Wednesday Spain had successfully sold €3.4 billion in debt bonds. Further to this Germany's Producer Price Index for March hinted at the ECB possibly making another rate hike in May, and as a result the currency rebounded and ended the week trading above 1.4550 against the Dollar.

Germany's Consumer Price Index which is scheduled for release on Wednesday, will raise interest rate hike expectations in May should inflation increase inline with the 2.4% consensus. Previously rate hike expectations have strengthened the Euro, so expect much of the same to happen following the figure's release. The employment situation in Germany is expected to have improved in April as forecasts call for Thursday's unemployment rate to improve from 7.1% to 7.0%, with the number of unemployed expected to fall by 37,000.

The past week has seen the Dollar head on a downward trend against the major currencies. This was sparked by Standard and Poor's announcing that they were altering their credit outlook for the US economy from Stable to negative. The announcement highlighted the US Government's failure to tackle its $1.4 trillion budget deficit, resulting in the currencies broad-based decline. Even an improved outlook in the US Housing market, which saw an increase of 3.7% in existing home sales and a better than expected increase in building permits and housing starts, could do little to stem the Dollar's fall. Indeed against the GBP/USD exchange rate peaked at 1.66, a high that hasn't been seen in nearly 18 months.

The Dollar could potentially make a recovery this week as the docket looks to be generally supportive of the world's largest economy. On Monday Consumer Confidence is expected to have risen in April, and come Wednesday March's durable goods orders are expected to have reversed the previous month's declines with a 2.2% increase. Wednesday will also see the FOMC announce their interest rate decision for the month, but previous commentary from Fed officials has shown that a rate hike is unlikely. A 2.4% growth rate in the US economy could see the Dollar rally when Thursday sees the release of this year's first quarter GPD figures. The end of the week looks to be a little bit hazy for the Dollar as personal income and spending data provides a mixed outlook while the University of Michigan's consumer confidence survey is expected to echo the previous survey with consumer sentiment on the increase.

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