Tuesday, 31 May 2011

Foreign Exchange Daily Market Update 31/05/11

The British Pound opened the week a touch above 1.65 against the US Dollar, following a fairly positive week of economic data in the UK, which saw Consumer Confidence rise by the second highest level seen since 1993. Add to this an increase in house prices, Government borrowing dropping by record levels, and the release of 1st quarter Gross Domestic Product (GDP) figures showing 0.5% growth, it has certainly helped the exchange rate no end.

It is unlikely though, that this week will follow a similar pattern, albeit due to the fact that the UK economic calendar is decidedly empty. Apart from Purchasing Manager Index figures for manufacturing, construction and services being released on consecutive days from Wednesday, the foreign exchange market will be more than likely to take direction from the European and US economies, and broader-based risk sentiment.

The Euro continues to face severe pressure, but has found support as an article published by the Wall Street Journal, suggested that Germany is considering ‘a rescheduling of Greek bonds to facilitate a new package of aid loans’, as it seems that the Euro-zone’s strongest economy accepts that without their help, the possibility of Greece running out of funds in the next month could have disastrous consequences for the rest of the member states.

In terms of monetary policy, the currency exchange market seems to be speculating that the chances of another rate-hike from The European Central Bank (ECB) in June are rapidly diminishing. With debt contagion worries still weighing heavily on policy-makers mind’s, the realisation is that whilst raising the interest rate once again would see a short term boost for the Euro currency, the knock-on effect could be a complete wipe-out of growth across the region.

The US Dollar could well benefit from any potential fall-out in Europe, and signs of weakness in the UK. The greenback is seen as one of the world’s ‘safe-haven’ currencies, and the longer there is indecision in regards to the EU, the IMF, and even the Bank of England, the dollar may well see welcome flows which benefit the exchange rate.

This coming week will be data-heavy for the US, so expect any surprises to make big moves in the foreign exchange market. Tuesday will see the release of Consumer Confidence figures for May, moving on to ISM Manufacturing figures on Wednesday, and concluding with the potentially market-moving Non-Farm payroll figures on Friday. All of these data events are seen by the market as having high-importance in terms of the overall health picture of the US economy, particularly key components such as the manufacturing and labour markets, so traders will be exercising caution, looking for any surprises.

Friday, 27 May 2011

Foreign Exchange Daily Market Update 27/05/11

Whilst still enjoying the gains it made following Wednesday's Gross Domestic Product (GDP) figures, the Pound moved to a two week high against the US Dollar following a less than supportive round of US figures. The Pound was also supported by report from research firm GfK that consumer confidence had improved in the UK. According to the report consumer confidence rose by 10 points to a reading of -21 to mark the second largest increase since May 1993. Another turn of good news came this morning, when according to Nationwide Building Society, house prices rose 0.3% in May to beat estimates for a 0.1% increase. The remainder of the day will be devoid of UK figures leaving the Pound once again subject to wider macro-economical influences.

In a light day of economic figures, the Euro performed well against the US Dollar during the first half of the day. The Euro was bolstered by rumours that the Chinese government were interested in buying Portuguese bonds. If the rumours are true then this would provide the Euro-zone with some much needed funding as the International Monetary Fund (IMF) is unwilling to commit further funds to the region until refinancing guarantees for debt ridden nations, including both Portugal and Greece, are approved.

Germany's Consumer Price Index (CPI) for May headlines the European session today with forecasts calling for price growth to slow annually from 2.4% to 2.3%. Although this predicted outcome would mean that inflation remains elevated, it does take some of the pressure off the ECB to raise interest rates, which is widely expected to have a negative impact on the weaker European nations. Elsewhere on the docket there are a number of Euro-zone confidence indicators for May, the most influential of which being the economic confidence survey and this is expected to tick slightly lower from 106.2 to 105.7. Weaker sentiment toward the Euro-zone is likely to push the currency lower.

The US Dollar lost ground today as foreign exchange traders were disappointed by yesterday's revisions to first quarter GDP figures. Economists had been expecting that the US economic growth rate would be revised up from 1.8% to 2.2%, however the figure was left unrevised. The personal consumption component of the GDP total was revised down from 2.7% to 2.2%, missing estimates for the figure to rise to 2.8%. Similarly core consumption slipped below the consensus of 1.5% to 1.4%. This week's jobless claims figures provided a mixed outlook for the US labour market, as ongoing claims fell from 3.711 million to 3.69 million while initial jobless claims rose from 409,000 to 424,000. The overall picture is one of a very weak US economy which pushed the GBP/USD currency exchange rate to a high of 1.64, while against the Euro the exchange rate hit a high of 1.4203.

The US docket will end the week with more figures on personal spending. In April personal spending is expected to slow from March's growth rate of 0.6% to 0.5%, (although given that consumption was weaker in the GDP total this may well be revised down). The core reading of personal consumption (which excludes food and energy purchases), is however expected to pick up slightly from 0.1% to 0.2%. Unlike the GDP personal consumption component which only covers data gathered from January to March, today's monthly figure will provide a more timely and up-to-date picture of consumer spending. Elsewhere on the docket, pending home sales for April are set to contract by 1.0% following March's 5.1% increase. However given that new home sales figures released on Tuesday for the same period showed a bigger than expected increase, then its possible that the outcome may be announced higher, if so then the Dollar could pick up as the housing market improves, but losses on the currency could be seen if pending sales fall below expectations.

Thursday, 26 May 2011

Foreign Exchange Daily Market Update 26/05/11

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.

Wednesday, 25 May 2011

Foreign Exchange Daily Market Update 25/05/11

The British Pound performed well against the US Dollar yesterday, reaching a daily high of 1.6208, and against the Euro, closed the day where it had started at 1.1473. This was despite a worse than expected budget deficit for April. According to figures released by the Office for National Statistics (ONS), public sector net borrowing dropped to £9.95 billion, down from £17.88 billion. However, it was not as low as analyst's expectations for £6.5 billion. The outcome highlights the difficulty that the government faces in cutting back spending. The Pound performed fairly well despite more negative news, with credit ratings agency Moody's stating that they are reviewing their ratings on government supported banks, which include Lloyds and RBS, as it is believed that any withdrawal of government support would weaken their credit worthiness.

1st quarter GDP figures headline the UK's economic docket today. Preliminary readings showed that economic growth remained unchanged at 0.5% since the 4th quarter of last year to match estimates, while annually economic growth was at 1.8%. The outcome means that UK economy hasn't grown since the third quarter of last which is clearly poor sign for the UK's recovery. The breakdown of the GDP total revealed some mixed results with private consumption falling by 0.6% missing expectations for 0.1% increase. Imports were expected to recede by 0.7% but fell by 2.3%, and exports beat expectations by growing at rate of 3.7% against the 2.1% consensus.

Against the Dollar the Euro followed a similar path to the Pound, with the EUR/USD exchange rate pushing up to levels above 1.4130 by the middle of the US session. The Euro enjoyed a rally following the publication of Germany's IFO business confidence surveys. The data showed that the short-term outlook German firms had on current market conditions remained relatively unchanged from last month's reading of 114.2. However the 6-month forward looking index was slightly lower at 107.4 down from 107.7 indicating that businesses see risks to the economic recovery over the longer-term as the global economy slows.

In what will be a light day in terms of European figures the currency exchange market has already seen the result of Germany's forward looking consumer confidence survey, which came in just below estimates at 5.5 instead of 5.6. The data suggests that German consumers are becoming increasingly anxious, which could be caused by higher prices (notably food and fuel prices) or perhaps the debt woes of other Euro-zone member states such as Greece, and the potential impact that could have on their lives. The remainder of the docket will look at Italian retail sales which are set to tick lower in March and April's French jobseekers total, which is set to drop slightly, indicating a small improvement in the French labour market. .

The Dollar was broadly weaker against the other majors on Tuesday, as risk appetite settled back into the foreign exchange market. The US currency should have gathered strength as New Home Sales in April grew at an impressive rate of 7.3%, the highest rate of growth since December. The outcome overshot expectations for a 1.7% increase in the sale of new homes and brought the annualized total up to 323,000 units. Elsewhere on the docket the Richmond Fed manufacturing index fell sharply to -6 from 10 in May, greatly missing expectations for the index to edge lower to 9.

Today's docket contains more US housing market figures with March's House Price Index expected to show that the value of US homes fell by 0.5% month-on-month. April's durables goods orders have the potential to bring the Dollar lower, as forecasts call for a contraction of 2.5% following March's increase of 4.1%. Since durable goods are usually quite expensive, a slowdown in the number of orders placed is indicative of weaker consumer confidence and tighter credit conditions. Overall the docket looks set to weaken the US Dollar if the data comes in at expected levels, pushing the rate of exchange up on the GBP/USD and EUR/USD pairs.

Tuesday, 24 May 2011

Foreign Exchange Daily Market Update 24/05/11

The Pound fell against the Dollar and the Euro yesterday as foreign exchange traders scaled back their appetite for risk. The Bank of England's (BoE) Chief Economist, Spencer Dale, voiced his opinion on UK inflation in an interview yesterday with the Financial Times (FT). Dale stated that the BoE should raise interest rates gradually over the next two years as a means of combating inflation, and as such has been voting for a 25 basis point hike in the interest rate for the past 3 policy meetings, alongside fellow MPC member Martin Weale. Dale said in the FT - "I don't take lightly the impact this (possible rate hike) could have on some families. But I think the cost to our economy as a whole - were inflation to persist for longer and our credibility start to be eroded - would be even worse." Dale's statement does go some way to support the possibility of the BoE raising the interest rates at some point over the next 12 months, and this expectation could well provide some support for the Pound over the coming months.

April's Public Sector Borrowing and Public Finance figures headline the UK's economic docket today. Expectations call for government borrowing to fall from £16.4 billion to £4.4 billion, which would be a positive sign for the economy and in turn the Pound. So should the figure fall in line with estimates, expect to see the exchange rate improve.

A weakened outlook and sovereign debt fears continued to weigh on the Euro yesterday with the Dollar making early gains against the single currency. The Euro's decline was not helped by worse than expected readings for Euro-zone and German Purchasing Managers Indexes (PMI) for April. Germany's index readings for service and manufacturing based activity fell to 54.9 and 58.2 respectively, missing estimates for readings of 57.0 and 61.0. For the Euro-zone manufacturing activity slowed with a PMI of 54.8 down from 58.0 and service based activity slipped from a reading of 56.7 to 54.9, bringing the composite index down from 57.8 to 55.4. The outcome would suggest that the Euro-zone is suffering from the effects of a slowdown in the global economy.

The currency exchange market has already seen a heavy dose of European data this morning, the most influential of which being Germany's final revisions to first quarter GDP. The revision showed that the economy expanded at a rate of 1.5% quarter-on-quarter, which was in line with preliminary readings, while annually the economy had grown by 5.2%. Despite the economy growing as expected, the individual components of the GDP figure were mixed resulting in the Euro currency's decline upon release of the data. One note of worry was that private consumption, investment in construction, and domestic demand of German goods came in well below expectations.

On a more positive note, Germany's IFO business sentiment gauges came in higher than expected. The current assessment index showed that German business remained as confident as last month about present conditions, when the index edged up 0.4 to 121.4, while the outlook for the next 6 months remains relatively weak with the future expectations gauge slipping slightly from 107.7 to 107.4. Lastly, new industrial orders in the Euro-zone are expected to have contracted in the month of March by 1.1% sequentially from February's 0.5% reading. Like yesterday's manufacturing PMIs, the decline of industrial orders points suggests that the slow down in the global economy is affecting the Euro-zone.

Falling risk sentiment boosted the Dollar's standing against the other majors yesterday, as it benefited from its status as a safe haven currency. The fall in risk appetite has been stoked by the sovereign debt crisis in the Euro-zone and perhaps more importantly, by the economic slowdown in China. As the world's second largest economy, China is considered very important in gauging the health of the global economy. News overnight showed that China is set to miss GDP estimates for 2011 as Premier Win Jiabao's campaign to rein in inflation is restraining growth in the economy. Published in today's Economic Information Daily were comments from government researcher Ba Shusong saying he's "concerned about a policy over-adjustment" as "China's economy faces a risk of an excessive downturn" if the central bank's tightening measures last too long.

Housing data from the US makes an appearance on the economic calendar today. The sale of new homes in April is expected to rise by 1.7% to bring the annual total to 305,000 units sold from 300,000. However, given that last week saw existing home sales slump over the same period and both building permits and housing starts contract, the possibility that new home sales will fall below expectations is very real. If the outcome comes inline with analysts' expectations then the Greenback is likely to find support, however if the figure falls below the consensus then the currency could see potential weakness.

Monday, 23 May 2011

Foreign Exchange Daily Market Update 23/05/11

Last week's mix of economic figures produced some choppy price action in the currency exchange market as far as the British Pound was concerned. The currency saw gains on Tuesday when it was announced that Consumer Prices rose by 4.5% year-on-year to beat analysts' expectations for a 4.1% increase. The higher than forecast inflationary data stoked expectations that the Bank of England may raise interest rates later this year, and that policy makers will have take a more hawkish stance towards monetary policy. However on Wednesday, the MPC's minutes showed that the vote to maintain the current base rate of 0.5% remained unchanged at 6-3, with Andrew Sentance, Martin Weale and Spencer Dale being the three to vote for a rate hike. Despite the minutes showing that inflation is expected to hit 5%, most policy makers saw risks to the economic recovery if rates are raised too quickly. As rate hike expectations faded the Pound slipped to this week's low of 1.6105 against the Dollar. The Pound's decline was further aided by April's jobless claims rising by 12,400 in April instead of remaining unchanged as economists had expected. But the Pound didn't remain subdued for long, and received a welcome boost on Thursday with higher than expected retail sales figures for April showing month-on-month growth of 1.1% ahead of the estimates for a mere 0.8%.

A light week of economic figures lies ahead for the UK, which doesn't start until Tuesday when April's Public sector finances are published. Forecasts call for government borrowing to fall to £4.4 billion down from £16.4 billion and the outcome has the potential to lift the Pound if forecasts are correct. The big figure of the week though is the Office for National Statistic's preliminary reading for first quarter GDP. Economists believe that the UK's growth rate will stagnate at 0.5%. If this forecast is correct, it will mean that the UK has not grown since the third quarter of last year, and will most likely result in Pound's decline.

The Euro put in a strong performance for much of last week, making gains against both the US Dollar and the Pound. At the start of the week, a summit of European finance ministers was being held in Brussels. Finance ministers agreed to endorse Portugal's €78 billion bailout package, but the package still requires approval by all euro-area governments, and is expected to run over a 3-year period if approved. With regards to Greece, the summit asked the nation to sell assets and deepen its spending cuts in order to win an extension of its aid package to €110 billion. However the Greek debt crisis has caused some controversy among member nations, as there is some discussion over whether debt restructuring is even a possibility for Greece. The uncertainty over Greece's future meant that on Friday the Euro slipped massively from a high of 1.4345 to below 1.42 against the US Dollar, while against the Pound the Euro ended the week at 1.1476.

On the data front, the single-currency benefited early on from a better than expected Euro-zone trade balance surplus in March, with a figure of €2.8 billion, rising from the previous reading of - €3 billion. On Wednesday the ZEW economic sentiment gauge underperformed for both Germany and the Euro-zone but the figure still remained positive. Lastly, Germany's Producer Price Index grew at a pace of 1.0% month-on-month beating forecasts for 0.6% and lifting expectations that the ECB may raise interest rates for a second time this year.

European figures dominate the foreign exchange market this week by sheer volume alone, the big figure of which being the final revisions to Germany's first quarter GDP. The preliminary reading of 1.5% is expected to remain unchanged. However while Germany's economic growth should prove to be a boost the value of the Euro there are a number of economic factors that point toward a weakened outlook for the region. On Monday Purchasing Manager Indexes (PMI) for Germany and the Euro-zone point to slowing growth in both manufacturing and services sectors, on Tuesday Germany's IFO business sentiment readings are also expected to tick lower from April. Further to this, Wednesday will see Germany's forward looking consumer confidence survey by market researcher GfK, with positive sentiment forecast to fall in June, and on Friday the Euro-zone economic confidence survey for May is expected to follow down a similar path. Potentially this week could lead the Euro lower if confidence in the region fails.

Housing market woes weighed on the Dollar on two separate occasions in the last week. On Tuesday both building permits and housing starts for the April came in below estimates with a contraction of 4.0% and 10.6% respectively. Thursday's existing home sales figures for the same period showed a 0.8% contraction. Further to this May's Empire manufacturing figure, April's Industrial Production, the Philadelphia Fed index and last the April's Leading Indicators composite index all pointed to a weaker production outlook for the US. However, by Friday, despite a lack of economic data, the Dollar regained some ground against the Euro as sovereign debt fears made room for gains to be made against the single-currency.

US housing data will be on the cards once again this week when on Tuesday April's new home sales are expected to slow to 1.7% growth down from 11.1% in March. However with last week's housing data coming in below estimates, there is a very good chance that traders will see the same outcome. This will then be followed by Friday's pending home sales which are set to decline by 1.0% month-on-month. Should this happen then the Dollar should weaken against the other majors. April's forecast contraction in Durable Goods Orders could also weigh on the Dollar, as well as the expected decline in house prices in March. By Thursday the Dollar could finally get some respite when the annualized first quarter GDP figure crosses the wire showing that the economy grew by 2.2%. Lastly income and spending estimates may leave the Dollar trading lower yet again, as forecasts call for the growth of personal income to slow to 0.4% from 0.5% and for spending slow to 0.5% down from 0.6%.

Friday, 20 May 2011

Foreign Exchange Daily Market Update 20/05/11

The Pound experienced a rebound in the exchange rate following better than expected retail sales figures for April. The Office for National Statistics reported sales in April advanced by 1.1% to beat expectations for a 0.8% rise. The increase was attributed to the recent warm weather and extra public holidays. The outcome pushed the Pound up to a high of 1.6207 versus the US Dollar and 1.1370 against the Euro. However, the rise was short-lived and by mid-afternoon the Pound had fallen back to levels in line with the open of the trading day. With Friday being devoid of UK economic figures the Pound will be subject to broad based risk sentiment on the global foreign exchange market.

Fears over the Greek debt crisis continued to weigh heavily on the Euro and without any economic data to support the single currency, price action against the Dollar was choppy. Divided opinions from ECB officials on how best to handle the turmoil in Greece only exasperated the issue. ECB board Member Nout Wellink voiced his opposition to restructuring Greece's debt, saying that such action would hurt the banking sector throughout the Euro-region and as such heighten the risks of debt contagion. Further to this Jurgern Stark of the ECB said that the central bank would not accept Greek bonds as collateral if there was a decision to lengthen the terms of Greece's debt repayments.

In a day for the foreign exchange market European figures dominate; with the economic docket having already seen Germany's Producer Price Index (PPI) for April beat analyst expectations. Producer Prices rose by 1.0% month-on-month up from 0.4% increase in March when economists had predicted 0.6% increase, while annually price growth accelerated from 6.2% to 6.4% to beat the consensus for growth to slow to 6.0%. Higher energy prices attributed to the rise in PPI as electricity prices were up by 8.5% from last year, with Crude Oil and Petrol prices rising by 17.6% and 15% respectively. This news saw the Euro rally early on, and strengthen further when March’s current account deficit for the Euro-zone narrowed from a downwardly revised €8.9 billion to €3.8 billion. The trading week will close with May’s Euro-zone consumer confidence, which is expected to show that sentiment has worsened since April with the index falling from -11.6 to -12.0. A negative outcome could lead the Euro to lose some of this morning’s gains.

Yesterday’s US docket provided a mixed outlook for the currency exchange market. On the one hand jobless claims provided an improved outlook for the US labour market as claims fell below the expected levels, with first time claims falling to 409,000 from 438,000. However, figures from the National Association of Realtors showed that existing home sales in April unexpectedly contracted by 0.8% despite forecasts calling for a 0.2% increase. Furthermore, May's reading for the Philadelphia Fed manufacturing index fell way below the expected score of 20.0 to come in at 3.9. This reading was down heavily from the previous score of 18.5 in April. Ultimately the news lead the Dollar lower against the other major currencies with the GBP/USD rate rising to 1.6235 and EUR/USD pushing up to a high of 1.4316. As the US calendar effectively ended on Thursday, price action for the Dollar is likely to remain subdued heading into the weekend.

Thursday, 19 May 2011

Foreign Exchange Daily Market Update 19/05/11

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.

Wednesday, 18 May 2011

Foreign Exchange Daily Market Update 18/05/11

The Pound saw a sharp appreciation in the currency exchange markets yesterday morning, following a bigger than expected rise in UK consumer prices. The data showed UK CPI at a 2 and-a-half year high of 4.5%, beating analyst’s estimates for a reading of 4.2%. However, the currency pared its gains later on as investors acknowledged higher inflation for now was unlikely to lead to an interest rate rise before year-end. Jeremy Stretch, currency analyst at CIBC commented ‘’ There were rumours of a strong figure around 4.4 percent, but it's higher than that’’, but added ‘’ Sterling hasn't really been able to push on after the knee-jerk reaction’’.

In a letter to the UK Treasury, Bank of England (BoE) Governor Mervyn King said that trying to bring inflation back to target quickly (by raising the key interest rate) would risk harming the economy and undershooting the central bank's 2.0 percent target in the medium term. Rate-setter Ben Broadbent, who will replace one of the most hawkish members of the Monetary Policy Committee (MPC), Andrew Sentence next month, told the government's Treasury Committee there remained "huge risks" both to raising or not raising rates, adding that he would have broadly followed the BoE's direction on policy, suggesting he does not share Sentance's strong arguments for raising rates.

This morning saw the release of the BoE’s minutes from the last policy meeting. There was little surprise when the minutes revealed no change in voting for either the key interest rate, or the central bank’s asset purchase programme; the MPC members voting 6-3 and 8-1 for the maintaining of the current interest rate and asset purchase target respectively. This news was closely followed by UK unemployment figures, which showed that the number of unemployed fell for the 3 months to the end of March by 36,000 to an overall figure of 2.46million. This change leaves the UK unemployment rate lower at 7.7%, down from 7.8%, but the claimant count actually rose from 4.5% to 4.6% for April.

The Euro currency has been on a downward trend through the early part of this week, particularly against The Pound, and yesterday’s disappointing ZEW Economic Sentiment survey results for Germany and the Euro-zone as a whole did little to provide the region with a boost. Turbulent times are ahead for the region, with IMF chief Dominique Strauss-Kahn currently behind bars at the Rikers Island facility in New York, facing charges of alleged sexual assault. His incarceration has thrown one of the world’s most powerful financial institutions into chaos, with market experts predicting that it could have larger ramifications for the European and global economy, and in turn the foreign exchange markets. Strauss-Kahn was the strongest voice behind muscular but often unpopular efforts to prevent debt defaults in Euro-zone nations, including Greece and, more recently, Portugal. The IMF’s temporary head, John Lipsky, is a highly respected former U.S. Treasury official and one-time JPMorgan Chase executive. But he’s not nearly as well-known in the political world, causing many to wonder whether the IMF will falter in making the case for widely shared contributions to financial rescue efforts.

The US Dollar weakened against most of its major counterparts during the overnight trade, but to be regaining its footing as investors scale back their appetite for yields. The dismal report for US housing starts yesterday and build permits may well have sparked a rise in risk aversion, and the rebound in the Dollar may gather pace, benefiting once more from its safe-haven status. However, the Federal Open Market Committee is scheduled to deliver its policy meeting minutes this evening. Any comments from the central bank are likely to heavily influence rate movement and we may see Chairman Ben Bernanke continue to highlight the ongoing weakness within the real economy as he aims to encourage a sustainable recovery, with chances of an interest rate-hike whilst the recovery remains frail remaining increasingly unlikely.

Tuesday, 17 May 2011

Foreign Exchange Daily Market Update 17/05/11

Despite yesterday's lack of data the Pound managed to rebound from a low of 1.6158 against the US Dollar and to test levels of 1.6250, while at the same time the currency ended the day lower against the Euro at 1.1440 down from its early morning high of 1.1505.

Today, the UK's docket will focus on inflation. The headline figure, the Consumer Price Index (CPI) was expected to show that prices rose annually by 4.1% in April and that the core index was to hold steady at 3.2%. However inflation came in above these expectations with the core index reaching 3.7% and the total CPI reading hitting 4.5%. The Bank of England has repeatedly stressed that higher food and energy costs are temporary and will die down, but with the central bank forecasting that CPI will rise to 5% this year, an interest rate hike may well be on the way. The outcome will raise expectations that the MPC's last vote count will show at least 4 members voting for some form of a rate hike, but traders will have to wait until Wednesday for the release of the minutes to May's policy meeting.

The FX market seemed to have little reaction to yesterday's Euro-zone consumer price index which rose at an annualized rate of 2.8% April to meet expectations, with core price inflation coming in above the consensus with 1.6% growth. At the same time, the region's trade surplus was larger than expected with non-seasonally adjusted balance showing a surplus of €2.8 billion. The currency also remained stable in the face of IMF Managing Director Dominique Strauss-Kahn being arrested on sexual assault charges. Strauss-Kahn was scheduled to attend the EU Finance Minister's Summit being held in Brussels today, but Deputy MD Nemat Shafik has gone in his place. The summit had been called to discuss, among other things, the Greek bailout package, with finance ministers asking the nation to sell assets and deepen its spending cuts in order to win an extension of its aid package to €110 billion. Finance ministers also agreed to endorse Portugal's €78 billion bailout package, but the package still requires approval by all euro-area governments, and is expected to run over a 3-year period if approved. The EU Finance Ministers' summit continues for a second day today.

Looking at today's scant line up, economic confidence is expected to have fallen across Germany and the Euro-zone in the month of May, according to forecasts for the ZEW surveys. Economic analysts foresee the index slipping from 19.7 to 17.3 in the Euro-zone, while the German reading should fall to 4.5 from 7.6. As sentiment weakens in the Euro-zone, the outcome has the potential to weigh on the Euro exchange rate making it cheaper to buy Euros.

During a speech in Washington, the Fed Chairman Ben Bernanke suggested that the US government should fund research and development. The Chairman believed that this would boost economic growth in America, while also supporting science through education. Notably Bernanke refrained from commenting on the outlook for the economy or monetary policy. On the data front, the New York Fed's Empire manufacturing index showed that manufacturing activity grew at a slower pace compared to April, as the index fell from 21.70 to 11.90, missing expectations for 19.70 reading. This was then followed by a disappointing NAHB housing market index which held at 16, missing calls for a print of 17.

The week's first round of US housing market data makes an appearance today with building permits set to rise by 0.3% in April to an annualized rate of 587,000, with housing starts for the same period expected to pick up 3.5%. A small increase in building permits would highlight the weak state of the US housing market.