Foreign Exchange Market Overview

Thu, April 28, 2011

The Pound made a run on 1.66 against the US Dollar during yesterday's trading session and retraced lost ground against the Euro to test a high of 1.13. The currency's recovery from Tuesday's decline was owed to the year's first quarter GDP figure coming in line with analysts' expectations for a 0.5% economic growth rate, to pair the contraction seen in the fourth quarter of 2010. The outcome banished fears that the UK could be heading for a double dip recession. Of the GPD breakdown, manufacturing and services based activity saw growth whilst the construction sector continued its decline from the end of 2010. Despite the growth in the economy, the Office for National Statistics said the outcome amounted to, in real terms, economic stagnation as the economy is essentially at the same level it was by the end of the third quarter of 2010. With another long weekend in tow, economic figures from the UK will be absent from the economic docket on both Thursday and Friday. This leaves the Pound at the mercy of macro economic conditions.

The Euro held a narrow range against the Dollar throughout most of yesterday and maintained a price range of 1.1270 to 1.13 versus the Pound. The currency was able to maintain this relative level of stability as nervousness over the Fed's press conference outweighed fears over the region's sovereign debt crisis. On the data front, the anouncement that Germany's consumer price index rose to its highest level seen since October 2008, aided in raising interest rate hike expectations for the ECB's May policy meeting, as consumer price grew at a rate of 2.4% annually. However as the risks of sovereign debt intensify, the ECB may relax its stance on stamping out inflation, as higher borrowing costs could worsen the situation in the weaker EU peripheries.

German unemployment figures for April headlined this morning's European calendar. Economists forecast that the number of unemployed would have fallen in Germany by 37,000, pushing the unemployment rate down from 7.1% in March to 7.0%. However upon the actual release, the number of unemployed fell in line with expectations but the unemployment rate remained stable at 7.1%. The Euro had strengthened ahead of the release but with the unemployment rate remaining unchanged the GBP/EUR rate recouped slightly.

Following the announcement of the Federal Open Market Committee's latest interest rate decision the Dollar fell against both the Euro and the British Pound, as US policy makers decided to hold interest rates at 0.25%, and in the conference that followed announced that the second round of quantitative easing would end, as scheduled in June. In the first ever regularly scheduled, post decision conference, Fed Chairman Ben Bernanke announced the central bank has cut this year's GDP growth forecast to 3.1%-3.3% from the previous outlook of 3.4%-3.9%. The Chairman also vowed to keep its benchmark interest rate near zero for an "extended period," despite near term inflation which the central bank now forecasts to rise between 2.1% and 2.8% against the previous range of 1.3-1.7%. The outcome saw the Euro surge towards 1.4790 before meeting some resistance, and the Pound punch through the morning"s ceiling of 1.6570 and peak at 1.6630. Elsewhere, orders for durable goods in March, surprised economists who had expected that orders would advance 2.3% from the previous months originally recorded contraction of 0.6%. Instead order increased by 2.5% and February's contraction was revised up to show a 0.7% increase in orders.

On the docket this afternoon, the US is scheduled to announce its first quarter GDP figures for 2011, with forecasts calling for the economy to grow by 2.4% up from 0.4% in the previous quarter. The increased pace of economic growth should lend weight to the Dollar. Further into the session Pending Home sales are set to slow in March with a growth rate of 1.5% down from 2.1% in February. The slowdown would be in line with the weakened state of the US hosuing market but since last week's sales of existing homes put in a better than expected performance, it is entirely possible that the same could be seen here.

Data Releases