Daily Foreign Exchange Market Update

Thu, June 23, 2011

Yesterday the British Pound traded lower against both the US Dollar and the Euro. The foreign exchange market reacted to the only key economic news to be release from the UK, that being the Bank of England's minutes to their June policy meeting. The minutes revealed that the vast majority of policy makers had voted to hold the current interest rate of 0.50% with only Spencer Dale and Martin Weale voting to increase the benchmark lending rate by 25 basis points. This was expected given that lead hawk Andrew Sentence stepped down from the Monetary Policy Committee (MPC) at the end of May. Looking at the asset purchase programme, the majority of voters called for maintaining their stock of asset purchases at £200 billion, with Adam Posen being the only member of the MPC voting for a £50 billion increase in the programme. Despite this, the minutes showed that some members said it was possible that further asset purchases may be warranted if the downside risks to inflation materialized. This lead the GBP/USD exchange rate to fall to 1.6093 by the open of the US market, and for the GBP/EUR exchange rate to drop to 1.1166, making the currency exchange market more expensive for buying Dollars and buying Euros.

Data will be on the light side today, with May's loans for house purchases and the Confederation of British Industry's reported sales figures for June making up the UK's figures. Loans for house purchases are expected to pick up and such an outcome would bolster the Pound's standing against the other majors, while June's reported sales index is expected to fall from 18 to 13 which could potentially hamper any rally on the Pound.

With the Greek Prime Minister George Papandreou winning his confidence vote yesterday to remain in power, the nation will be able to push through the proposed austerity measures necessary to win a second bailout package from the International Monetery Fund and the EU and avoid defaulting on its debt. However the market seemed to show very little reaction to the news with price action holding a narrow range against the US Dollar during the European session.

This morning the Euro-zone's major contribution to the economic calendar, the Purchasing Manager Index (PMI) for services and manufacturing came in bleow expectations to weaken the Euro's position against both the Pound and the USD Dollar. The Euro-zone readings showed that activity slowed in June in both sectors but remained aboth the 50 point base line for growth. Similarly Germany's PMI for manufacturing weakened over the same period but service based activity surprised economists with the index rising from 56.1 to 58.3. The GBP/EUR rate is currently sitting at 1.1212 and EUR/USD at 1.4270 down from yesterday's high of 1.4442.

The US Dollar made some headway yesterday following the Federal Reserve's decision to maintain the current level of interest at 0.25%. The decision by the Fed to hold the benchmark lending rate was not unexpected, yet the Dollar's appreciation was attributted to a drop in risk sentiment amongst traders. Indeed during his second ever post-rate decision conference, Fed Chairman Ben Bernanke stated that previous economic growth forecasts had been "overly optimistic" and that the nation's level of unemployment would remain around 8.9% to 8.9% by the end of the year. His comments seem to suggest that the Fed is unlikely to raise interest rates before the end of the year, this means market participants will instead focus on whether or not the central bank will go for a third round of Quantitative Easing (QE). As it stands Bernanke said that the $600 billion QE programme is still due to expire at the end of this month.

Looking ahead May's New home sales mark the most significant release for this afternoon's trading session. Forecasts call for a month-on-month decline in homes sales of 4.0% following a 7.3% increase in April. This would bring the annual total down from 323,000 units to 310,000 and the outcome could potentially weaken the Dollar, however a surprise to the upside could extend the currency's recent gains.

Data Releases