Foreign Exchange Daily Market Update

Thu, May 26, 2011

The Pound made strong gains against both the Euro and the US Dollar during yesterday's trading session following the release of this year's first quarter Gross Domestic Product (GDP) figure. According to official figures from the Office for National Statistics (ONS) the UK economy grew at 0.5% quarter on quarter to remain in line with analyst expectations. A breakdown of the GDP total revealed that growth was spurred by exports having risen at a rate of 3.7%, up from 1.7% in the previous quarter, and with imports falling by 2.3% the country's net trade deficit fell to £5.7 billion down from £11.5 billion in the last quarter of 2011. However, weaker than expected household consumption and investment dampened the economic recovery and prevented the Pound from making further gains. With the UK's growth still subdued, many foreign exchange traders speculate that Bank of England policy makers will refrain from raising interest rates later this year. However the Organisation for Economic Co-operation and Development (OECD) stated, after praising the government's austerity programme, that the Bank of England should begin raising rates this year in order to prevent runaway inflation.

The well of UK economic data appears to have, for the most part, dried up for the remainder of the week, leaving the Pound exposed to effects of wider macro-economic factors such as risk aversion. The only scrap of data due for release today is May's consumer confidence survey by GfK, which is expected to show that consumer sentiment remained firmly entrenched at -31 since April. The expected outcome in consumer confidence would tally with the contraction in personal consumption shown in the overall GDP figure.

Yesterday's trading session resulted in some very choppy price action for the Euro, in particular against the US Dollar; where it closing the day slightly lower overall. The single currency continued to be weighed down by Greece's sovereign debt woes, and softer than expected consumer confidence readings in Germany. The Euro did manage to retrace some of it's loses following news that the Finnish Parliament had approved the Portuguese bailout, despite concerns that Finland might block the rescue package.

Another relatively quiet day of European data will mean that currency exchange traders will be interested in comments from the European Central Bank (ECB)'s President Jean-Claude Trichet, and executive board member Ewald Nowotny on European economy, and Lorenzo Bini Smaghi's comments on inflation when speculating the Euro's movements. Other than that, traders will be keeping a close eye on Greece for any further developments in whether a restructuring of its debt will take place.

Orders for durable goods fell in the US by 3.6% during April to outpace the forecast decline of 2.5%, while durables exclusive of transportation goods sunk by 1.5% to fly against a 0.5% expected increase. Falling demand for aircraft and disruptions to the supply of car parts lead to the declines. The contraction in orders was a sharp reversal to March's upwardly revised 4.4% increase, and supports the data from the Richmond and Philadelphia Federal Reserves, which reported a slowdown in manufacturing activity. The data weakened the Dollar's standing in the foreign exchange market, allowing the GBP/USD exchange rate push towards 1.63.

Looking ahead to this afternoon, revisions to the first quarter GDP readings for the US could push the Dollar higher and retrace some of yesterday's declines. Forecasts call for the US economic growth rate to be revised up to 2.2% annually, compared to the preliminary reading of 1.8%. Further to this, personal consumption is expected to pick up to 2.8% from 2.7% and the core personal consumption reading, which excludes food and energy in its calculations, is set to remain at 1.5%. The US Dollar could also find support from this week's jobless claims figures which are forecast to see initial claims fall to 404,000 to 409,000, while continuing claims is set to fall from 3.711 million to 3.7 million.

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