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.