Foreign Exchange Daily Market Update

Thu, May 19, 2011

The Pound suffered yesterday as the economic docket reinforced a negative outlook for the nation. The GBP/USD exchange rate slipped from the day's high of 1.6288 to 1.6105 when it came to light that the number of Britons claiming jobless benefits rose in April by 12,400. This is the fastest pace of jobless growth the country has seen since January of 2010, and came in despite estimates calling for no change to occur in the claimant count rate. Further to this the Bank of England published it's minutes to May's policy meeting, revealing that most members of the MPC see raising interest rates as a risk to economy's recovery. The minutes showed that the vote was split 6-3 in favour of keeping interest rates on hold this month. As usual Andrew Sentance voted for a 50 basis-point increase, while Spencer Dale and Martin Weale continued to vote for a 25 basis-point rise. Many trader's had hoped that; given the central bank's forecasts on inflation reaching 5% this year and recent data pointing towards these forecasts being true, that more policy makers would have shifted to a more hawkish stance, which would have lead to an appreciation in the Pound as rate hike expectations increase.

April's retail sales figures headline the UK's docket. Expectations had called for sales inclusive of fuel receipts to grow by 0.8% up from March's 0.2% increase, while excluding fuel sales, retail figures advanced by the same margin. However when the figure beat these expectations to see sales excluding fuel reciepts rise by 1.2% month-on-month and inclusive of fuel sales there was 1.1% increase, and further to this March's figures were revised up to 0.4% and 0.3% respectively. The market has reacted well to the news with the Pound putting in gains against the Dollar and the Euro.

A mixed outlook from ECB board members made it difficult for traders to speculate on where the Euro currency exchange rate is heading. Greece came back into the lime light when ECB board member Vitor Constancio said that restructuring Greece's debt could be in store to avoid a default, but argued that it ought to be "the last resort" as it entails "enormous consequences." However Governing Council member Ewald Nowotny said restructuring of Greece's debt is "definitely not an element of discussion" at the ECB. He then spoke of interest rates saying that rates will rise to match growth and inflation, despite the fact that further hikes could raise the risk of debt contagion. But for the most part it seems sovereign debt fears weighed on the Euro through the first half of yesterday as the EUR/USD dropped to a low of 1.4197 from 1.4286.

The European docket is looking exceptionally light today with the only event of interest being ECB President Jean-Claude Trichet and ECB Executive Board Member Gertrude Tumpel-Gugerell's commentary on the state of the European economy. Typically Trichet's comments hold a lot of sway within the foreign exchange market so expect the Euro exchange rate to move in either direction depending on the outlook Trichet provides.

The highlight of yesterday's North American trading session was the release of the FOMC's latest minutes. For the most part the minutes echoed Chairman Ben Bernanke's comments at the post-decision press conference in April, where he cited concerns among Fed policy makers over the "upside risk to the inflation outlook," and the downside risk to growth. However a few policy makers at the meeting said the increase in inflation risks meant that the Fed should stand ready to tighten financial conditions sooner than had been expected.

The week's second round of US housing figures make an appearance on today's docket. Existing home sales are expected to have risen by 2.0% in April, a slow down from March's 3.7% rise in sales. The data has the potential to weaken the Dollar's standing against the other majors as the housing market looks to remain week. With New homes sales having grossly missed expectations earlier in the week it is possible that today's figures could do the same.

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