Foreign Exchange Daily Market Update

Mon, May 09, 2011

Last week the Bank of England conformed to expectations, when it announced on Thursday that it would be maintaining its current monetary policy, with interest rates remaining at the historic low of 0.50% and retaining the stock of asset purchases at £200 billion. Without a policy statement to accompany the rate decision traders will have to wait until Wednesday 18th May to find out if there were any new policy makers joining the trio of hawks (Andrew Sentence, Martin Weale and Spencer Dale). Given that last week's Purchasing Manager's Index figures fell below forecasts, with weaker than expected growth being record in April for manufacturing, construction and the UK's largest economic contributor, it's services sector, the Bank of England will most likely hold off from raising rates in June arguing that higher interest could damage the country's recovery. However the BoE can't hold off from addressing the issue of rising inflation, as was evident on Friday when April's core Producer Price Index rose to 3.4% annually, beating estimates for 3.0% increase.

Despite making it's first full 5 day week since Easter, the UK economic calendar is looking almost bare. Monday and Tuesday will be relatively quiet aside from Monday's Royal Institute of Chartered Surveyor's (RICS) house price balance, leaving Wednesday to hold the focus as March's Visible Trade Balance sheet is scheduled for release, quickly followed by the Bank of England's quarterly inflation report, which traders will keep a close eye on for indications of when the central bank is likely to raise interest rates. Lastly Thursday will host the release of the National Institute of Economic and Social Research's (NIESR) GDP estimates for April and March's industrial production figures round off the week.

Price action for the Euro was choppy over the last week amid a mixed economic docket. On the positive side, the docket revealed that manufacturing activity in France, Germany and the Euro-zone, was greater than expected according to the final revisions of April's manufacturing PMI. Also Germany's industrial production was up by 11.2% annually according to Friday's production figures. On the downside growth in Germany and the Euro-zone's services sector were slower than expected, March's retails sales figures surprisingly contracted, and lastly Germany's factory orders showed slower then expected growth year-on-year over the same period. But the big news of the week was the ECB's interest rate decision, which came in on par with expectations as the Governing Council voted to hold the bench mark lending rate at 1.25%. Although the decision was widely anticipated, the market did not react well to the commentary by ECB President Jean-Claude Trichet despite Trichet stating that the central bank sees a "positive underlying momentum of economic activity in the euro area", as confirmed by recent economic data. Notably Trichet failed to use the watch word "strong vigilance" which would have been understood by economists to mean that further fiscal tightening lay ahead. Consequently at the end of the week there was a rush on selling the Euro with GBP/EUR exceeding 1.14 on the exchange rate and EUR/USD slipping down near 1.43.

A busy week lies ahead for the Euro-zone, starting on Monday with Germany's Trade and Current Account Balances for March due out followed by May's Sentix Investor Confidence survey. Skipping past Tuesday to Wednesday, Germany's CPI readings for April could add pressure on the ECB to raise rates should inflation raise beyond the 2.40% annualized reading. The ECB will publish its monthly bulletin on Thursday and GDP figures for Germany, France and the Euro-zone are scheduled to close the week on Friday. All three GDP figures are expected to show the respective economies have grown at a faster pace than in the previous quarters, providing the Euro with an opportunity to retrace last week's losses.

The US Dollar finished last week higher against the Euro and the British Pound as the week's economic data provided an improved outlook for the nation. Early in the week the Dollar made gains following the announcement that Osama Bin Laden had been shot and killed in his hideout in Pakistan. Further to this construction spending for March and April's ISM Manufacturing activity index came in above expectations on Monday, while on Tuesday factory orders for March were revealed to be up by 3.0% better forecasts for 2% growth. The Dollar hit a slight snag mid-week when the ISM non-manufacturing index came in lower than expected at 52.8 instead of 57.5, and the ADP employment change survey suggested that the number of employed rose by 179,000 instead of 195,000 as was forecast. The outcome weighed on the Dollar but was quickly dispelled by Friday when the highly anticipated Non-Farm Payrolls (NFP) figure revealed that the US economy had added a surprise 244,000 jobs in April, versus the 185,000 consensus. The news highlighted once again the discrepancy between the APD and NFP figures, and the Dollar recouped it's losses form earlier in the week once the news had cross the wires.

Over the coming week, the US calendar kicks off on Tuesday with April's import price index, before Wednesday sees the US publish is own Trade balance figures. Come Thursday the focus will fall on the nation's Producer Price Index and Advance retail sales figures for April. April's Consumer Price index and the University of Michigan's consumer confidence survey will close the week on Friday.

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