Foreign Exchange Daily Market Update

Tue, May 10, 2011

Monday's sparse data was not altogether encouraging for the UK, as the Halifax house price survey showed that month on month, prices contracted by 1.4%, which surprised economists, who had predicted that prices would climb by 0.1%. Despite this, the British Pound held a narrow range against the US Dollar between 1.6415 and 1.6348, and between 1.1400 and 1.1340 against the Euro until we drew closer to the open of the US session. By midnight the British Retail Consortium (BRC) released a report stating that sales picked up 5.2% in the 12 months up to April, but BRC Director General Stephen Robertson dampened the positive outcome by stating that the previous April reading was weak and didn't include Easter holiday spending, as this year's numbers did. At the same time the Royal Institution of Chartered Surveyors (RICS) published their house price survey for April, which showed that housing market conditions improved slightly in April, but the overall picture remained subdued.

With nothing on the docket today, traders will look to Wednesday for the release of the Bank of England's quarterly inflation report. Traders expect the inflation report to hold a dovish tone with comments stating that current inflation levels owe themselves to temporary factors such as higher fuel and energy costs. Should this be the case, rate hike expectations will dampen, and in turn could lead the Pound lower.

Germany once again showed its economic strength to the world when March's Current Account balance was released showing a better than expected trade surplus of €19.5 billion compared to the €13.3 billion that was expected. Further to this the value of Germany's exports rose by 7.3% over the same period, beating forecasts for a 1.1% increase. However, despite Europe's strongest economy continuing to gather strength, the Euro suffered as sovereign debt woes came back into trader's minds when Standard and Poor's cut Greece's credit rating from "BB-" to "B". Following the announcement a bid on selling Euros ensued pushing the exchange rate lower against both the Pound and the US Dollar.

This morning's tame docket from the Euro-Zone has already seen industrial production in France fall short of expectations, with March's figure dropping by 0.9% compared to the 0.4% forecast in growth. Manufacturing was no better, showing a 1.0% contraction. Italy's industrial production figures failed to impress as well, but unlike France, Italy saw some slight growth with production recording a 0.4% month-on-month increase, but still short of the 0.8% market expectation. With so little meaningful data due for release today, the Euro may continue to remain under pressure over Greece's sovereign debt and its recent credit downgrade by S&P.

Despite Monday's docket lacking US economic data, the Dollar put in a good performance, rising against several of the major currencies. Sovereign debt woes weighed on the Euro to see the Dollar extend its recent advance and push the exchange rate back to 1.4250 before backing off to 1.4350. Elsewhere on the foreign exchange market, the Dollar held steady against the Japanese Yen around 80.50 and against the Canadian Dollar, the US Dollar settled near 0.9650.

Looking ahead to today's US session, import prices headline the afternoon's figures, and expectations call for a 10.5% annualized increase in April, compared to the previous reading of 9.7%. Rising import costs could lead to increased inflationary pressures which the Fed may have to address later this year with a rate hike, but Friday's Consumer Price index will carry more weight in this matter. Still higher import prices will add weight to need for a Fed rate hike.

Data Releases