Foreign Exchange Market Overview

Tue, May 03, 2011

With last week being the run up to the Royal Wedding and comprising of only three working days, economic data from the UK was light on the ground. However of the data that was released, we saw the year's first quarter GDP figure announced, with economic growth coming in line with economist forecasts at 0.5% from the previous quarter. While the news shows that the UK has managed to avoid falling into a double dip recession the actual amount of economic growth we've seen means the economy has remained flat since the third quarter of last year.

The key figure for this week will be Thursday's interest rate decision by the Bank of England. Forecasts call for the central bank to maintain its current policy with interest rates remaining at 0.50% and the stock of asset purchases being held at £200 billion. Purchase Manager Indexes for all three sectors (manufacturing, construction and services) are to be released over the next three days with expectations calling for growth to slow across all three indexes which could weaken the Pound's strength. Producer Prices round off the week with the annualized growth rate expected to advance from 14.6% to 16.4% in April, possibly raising interest rate hike expectations for the MPC's June meeting.

For the most part the Euro was on an upward trend against both the US Dollar and the British Pound. The biggest economic data to come out from the region were its unemployment figures, with Germany, as the leading economy in the Euro-zone, showing that its labour market is improving with the number of unemployed falling by 37,000 in April to meet analyst expectations, while the unemployment rate remained at 7.1% despite forecasts for a slight improvement to 7.0%. For the rest of the region the unemployment rate remained stable at 9.9% in March, with reports from Eurostat showing that total unemployment fell by 9,000 from the previous month's figures. Among the other data to have been announced confidence amongst European consumers fell in April, as well as retail sales in Germany for the month of March, disappointing economists who had expected to see gains.

Thursday's ECB interest rate decision will be the main focus of this week's European data, but economists expect the central bank to hold off from raising interest rates so soon after their first rate hike in over two years. But as always the post decision conference will be significant in altering the Euro's price direction, with hawkish commentary from ECB President Jean-Claude Trichet likely to push the currency higher and comments that suggest higher risks to sovereign debt likely to push a selling bid on the currency. Elsewhere on the docket, Wednesday's Euro-zone retail sales could push the Euro lower as sales are expected to have contracted in March, and the same goes for Thursday's German factory orders and Friday's German industrial production where growth is expected to have slowed in March.

The Dollar's performance last week was somewhat shocking with the both the exchange rates on GBP/USD and EUR/USD moving to new highs as weakness set into the safe haven currency. This weakness in the Dollar was brought on by rate hike expectations being scuppered by the Federal Open Market Committee's (FOMC) interest rate decision and the Fed Chairman's comments in the first regularly scheduled, post decision press conference. The FOMC did not surprise economists when they announced to keep rates unchanged at 0.25%, citing that they did not want to damage the economic recovery. However what lead the Dollar lower was Fed Chairman Ben Bernanke's announcement that the inflation target for 2011 would be raised to 2.1-2.8%, while at the same time he lowered the year's GDP forecast from 3.4-3.9% to 3.1-3.3%. While he gave the US economy a bleaker outlook, he did announce that the quantitative easing program would end as expected in June. To add salt to the wound, the nation's first quarter GDP figures disappointed when the showed that the economy only grew by 1.8% instead of the expected 2.0%. Overall this lead the EUR/USD exchange rate to peak at 1.4882 and the GBP/USD rate to top at 1.6747.

Employment is the theme for US data this week of which the headline figures, Non-Farm Payrolls (NFP) and the Unemployment rate are scheduled for release on Friday. The widely anticipated NFP figure has been forecast by economic analysts to show that the US economy added 190,000 jobs in April, but this expected to leave the unemployment rate stable at 8.8%. But before Friday's big figures cross the wires, Wednesday's Challenger Job cuts report and the ADP employment change survey will provide insight into the outcome of NFP figure.

Data Releases