Foreign Exchange Market PRESS RELEASE

Thu, May 05, 2011

The Bank of England and European Central Bank both announced their interest rate decision today at 12:00 BST and 11:45 BST respectively. They both kept interest rates on hold with BOE keeping rates at 0.5% in UK as well as retaining its stock of asset purchases at £200 billion, while the ECB kept rates at 1.25% in Europe. The decisions to hold the current monetary policy for both banks was widely anticipated by economists and so far the market has shown little reaction to the news. While the Bank of England’s Governor Mervyn King, refrained from releasing a policy statement along side his rate decision, the ECB President Jean-Claude Trichet will be holding a press conference at 13:30 BST to provide markets with insight into the central bank’s take on the region’s current economic conditions. Any mention of “strong vigilance” with regards to inflation will indicate that the central bank may look to raise interest rates in June, pushing up the Euro’s value against the major currencies. However, should the bank head see scope for increased risks to sovereign debt contagion then the euro may weaken as the economic outlook worsens.

Foreign Exchange Market Overview 05/05/11

Wednesday's economic figures for the UK were less than encouraging as mortgage approvals, consumer credit and secured lendings on dwellings for March all missed market expectations. The number of loans approved for house purchases rose in March to 47,557 up from 46,708 in February missing the 48,000 expected approvals. Consumers credit rose by £0.5 billion over the same period instead of £1.7 billion increase and lending secured on properties only rose by £0.4 billion. The data meant the Pound weakened against its two major counterparts with the exchange rate falling to 1.6451 against the Dollar and to 1.1073 against the European currency. The Pound was kept suppressed with the announcement that the nation's construction sector saw weaker than expected growth in April, with a PMI reading of 53.3 down from 56.4. A breakdown in the PMI reading revealed that a contraction in housing construction (the first of its king this year) lead the index lower, but construction of commercial premises recorded a marked increase.

Although the Bank of England's interest rate decision is this week's headline figure, the actual announcement may not carry much weight in moving the currency market. The majority of market participants are expecting the BoE's stance on monetary policy to remain unchanged with interest rates holding at 0.50%, and as such the decision may have already been priced into the market. Elsewhere on the docket the PMI for the services sector, the final of the series, is due for release with expectations calling for the pace of activity to slow. Since both the construction and manufacturing PMI readings have come in lower than expected, a similar outcome for the services sector would confirm that the UK recovery is still very fragile and this in turn would reinforce the MPC's unwillingness to raise rates for fear of damaging the recovery.

The Euro seemed relatively unscathed from Yesterday's round of disappointing economic data. Like its UK counterpart, the Euro-zone recorded lower than expected PMI readings, albeit for the services sector instead of the construction sector. The services PMI were reported to have fallen in Germany, France, Italy and across the whole of the Euro-zone region in April, missing estimates for each of the individual indexes to remain unchanged from March. Likewise Euro-zone retail sales figure for March, disappointed economists who had forecast sales to remain unchanged year-on-year instead of contracting 1.7%. The data failed to stoke much of a reaction in the market, resulting in the GBP/EUR trading between 1.1073 and 1.1130 during European hours, and against the Dollar the currency held levels between 1.4840 and 1.4880.

Looking ahead, the ECB will be announcing its interest rate decision for the month, 45 minutes after the Bank of England makes its announcement. Expectations call for the central bank to maintain its current policy as raising interest rates for a second month could have longer term implications for sovereign debt risks. Still the press conference that follows could hold sway on price direction, as ECB President Jean-Claude Trichet is expected to use the phrase "strong vigilance" when speaking of inflation and the need to maintain price stability. Such commentary will likely lead to an appreciation of the single currency as expectations for rate hikes in June intensify, however if Trichet speaks of increased risks to sovereign debt then the opposite is likely.

Yesterday's docket seemed to carry a negative tone all round as data from the US failed to meet analyst expectations. Most notably the ADP Employment change survey showed that in April, the US economy added 179,000 jobs in the private sector; however this was 16,000 short of the consensus for 195,000 jobs to be added. The outcome could mean that Friday's Non-Farm Payroll (NFP) figure may also fall short of the 190,000 prediction; however there have been discrepancies between the ADP figure and the NFP in the past so the lower than expected outcome may not amount to much come Friday. The ISM non-manufacturing composite index showed that, the US's biggest economic sector (the services industry) cooled in April, with the index falling from 57.3 to 52.8, instead of increasing to 57.5.

Compared to the rest of the week, Thursday will be a quiet day on the US calendar, with only weekly jobless claims, non-farm productivity and unit labour costs reports for the 1st quarter to mark today's economic docket. The data, if positive, may provide little support for the US Dollar as the currency remains burdened by the Fed's loose monetary policy and near-zero interest rates.

Data Releases