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.