Foreign Exchange Daily Market Update

Fri, May 13, 2011

The Pound lost the gains it made against the US Dollar on Wednesday following the Bank of England's Inflation report as Thursday morning's manufacturing and industrial production figure for March came lower than expected. The reports showed that industrial production advanced to 0.3% up from the 1.2% contraction in February, but failed to meet the consensus 0.8% growth rate. With the data suggesting that the UK recovery is slowing, hopes for a rate hike in the third quarter of the year began to diminish, and traders speculate that the BoE may hold its wait-and-see approach through to the fourth quarter. The outlook of a sluggish recovery was then further emphasized by the NIESR's GDP estimate for April, which showed that growth slowed to 0.3% from 0.5% last month. The news sent the GBP/USD exchange rate down to a low of 1.6232 before making a recovery later in the US session. Against the Euro, the Pound traded steadily lower throughout most of the day until late into the US session when it levelled out at 1.1430.

The Euro dropped to a six-week low (1.4122) against the US Dollar on Thursday, following reports that industrial production in the Euro-zone fell unexpectedly in March. Production in the region fell 0.2% in March following February's 0.6% rise, when economists had expected to see production slow to 0.3%. Germany saw its output rise by 0.4% March, while France, Ireland, Greece and Spain all reported declines, leading the overall figure to show a contraction. Since European manufacturers have fuelled the region's economic recovery, the news came as quite a blow to the Euro.

Today's European figures provided an improved outlook for the Euro-zone. In the early hours of this morning, first quarter GDP figures for Germany exceeded expectations for 0.9% growth with 1.5%. France also performed well in the first quarter with its economy expanding at a rate of 1.0% over the 0.6% consensus. The data is a very positive outcome for the Euro-region and will go far in off setting the forecasted contractions in GDP for Portugal and Greece. The outcome also suggests that the Euro-Zone GDP figure, which is due out later this session, could come in above expectations for 0.6% expansion. Overall with Europe's strongest economies showing signs of continued growth, the Euro should strengthen and reverse yesterday's declines.

US figures were mixed on Thursday, as advance retails sale in April showed weaker than expected growth, while producer prices rose above the consensus. Retail sales in April grew by 0.5% when forecasts called for 0.6% rise, and the outcome was slower than March's revised 0.9% growth rate. Meanwhile, the Producer Price Index (PPI) for April showed the prices rose by 0.8% up from 0.7% in the previous month, and the core index rose by 0.3% over the 0.2% forecast.

Rate hike expectations could see the Dollar strengthen today as April's Consumer Price Index (CPI) is expected to rise to 3.1% annually up from 2.7%. With yesterday's PPI figures coming in higher than expected the outcome for the CPI reading could also follow suit. In either case a rise in inflation would apply pressure on the Fed to raise interest rates later this year. The Dollar could see further potential gains when the University of Michigan release their consumer confidence report this afternoon. Economists anticipate that consumer confidence will have improved in April with the index rising from 69.8 to 70.0, giving the Dollar scope to end the week on a high note.

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