Foreign Exchange Market Overview

Wed, May 04, 2011

The Pound stumbled yesterday as the economic docket reinforced a weaker outlook for the economy. April's Purchasing Manager Index (PMI) for the manufacturing sector dropped below the forecasted reading of 57.0 to come in at 54.6. While the reading still resides above the 50 point baseline for growth, the outcome still shows that manufacturing activity has slowed considerably, and this resulted in the Pound falling sharply against both the US Dollar and the Euro to the day's low of 1.6465 and 1.11 respectively. House Prices have fallen by 0.2% in April according to results from Nationwide Building Society's house price survey. Forecasters had predicted that month-on-month UK house prices would have grown by 0.1%, a slowdown in price growth compared to March's 0.5% increase. Annually house prices were expected to contract but by a smaller margin of 0.7% instead of the 1.3% contraction that was reported.

Looking ahead, mortgage approvals for March are expected to have risen from 47,000 in February to 48,000, while the net total of lendings secured on dwellings is expected to rise from £1.2 billion to £1.3 billion, indicating that credit is being made more readily available to UK consumers. Counter to this, activity in the nation's construction sector is expected to cool in April with the PMI reading slipping from 56.4 to 55.9. The outcome could weigh on the Pound and extend yesterday's declines.

Rising Producer Prices in March helped to stem the Euro's losses against the Dollar during the first half of yesterday, as month-on-month prices advance 0.7% to keep inline with forecasts while annually prices picked up from 6.6% to 6.7%. The increase in inflation helped to prop up the currency, as trader's raised their outlook for another interest rate hike at this Thursday's ECB policy meeting. However the ECB have already warned that a further rate hike could increase the risks of sovereign debt, making it unlikely that the central bank will take such action, but the chances are that the post decision conference will contain hawkish comments which in itself could support the Euro.

This morning's PMI for services provided a mixed outlook for Europe, while Germany, France, Italy and the Euro-zone all saw their services PMI come in below expectations with Germany's PMI scoring 56.8 instead of 57.7 and the Euro-zone coming in at 56.7 down from 56.9. However the Euro-zone composite came in with a solid reading of 57.8 to come in line with economist expectations. So far the market seems to have had little reaction to the slow down in services activity. Further ahead, the expected contraction in March's retail sales figures could have the potential to reverse some the Euro's gains today. Forecasts call for 0.1% contraction compared to February's 0.2% contraction, while annually sales are expected to have remained flat after sales rose by 0.4% in the 12 months prior.

March's surprising increase in US Factory orders aided the Dollar in extending its advance against the Pound, as orders grew at pace of 3.0% compared to estimates for 2.0% rise. With the hopes of the US recovery being pinned on its manufacturing sector the data is a welcome piece of news, and the recent weakness in the Dollar will mean that US made goods are more affordable for foreign buyers, which in turn is a positive element for the stock market.

Today's economic figures will be the first in a series that focus on the US employment situation. The employment change survey carried out by payrolls processor ADP is expected to show that in April the US economy added 195,000 jobs compared to the 201,000 that were added in March. Later into the session the ISM Non-manufacturing index is due for release with expectations calling for the index to improve marginally from March's reading of 57.3 to 57.5 in April.

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