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%.