Tuesday 7 June 2011

Foreign Exchange Daily Market update 07/06/11

With nothing on Monday's docket to guide price direction for the Pound, foreign exchange traders and market participants alike focused on the news that the International Monetary Fund (IMF) has backed Britain's austerity measures as put forward by Chancellor of the Exchequer George Osborne. The IMF said that "Strong fiscal consolidation is under way [in the UK] and remains essential to achieve a more sustainable budgetary position," and that the current economic weakness and above target inflation, which the IMF forecast to fall back to 2% over "reasonable time frame", are temporary. The Fund went onto say that it remains appropriate for the Bank of England to uphold the "current scale of monetary stimulus". This news supports forecasts that the BoE will maintain its current policy on Thursday when the Monetary Policy Committee (MPC) convenes to announce their rate decision. The IMF's support should have lifted the Pound but it seems the currency exchange market was more interested in the Fund's growth forecasts for 2011, which it lowered from 1.7% to 1.5%. This left the Pound to hit a low of 1.1185 against the Euro and 1.6340 against the Dollar.

Another quiet day for the UK will mean traders will have to hold their breath until Thursday's rate decision by the MPC and the accompanying trade balance data to get a sense of price direction for the Pound.

A better than expected Euro-zone Producer Price Index (PPI) reading for April lifted rate hike expectations, to see the Euro make some early morning gains yesterday as PPI rose by 0.9% over the expected 0.8%. Further to this the election of a new Portuguese government meant that Lisbon can implement the necessary budget cuts and austerity measures as specified by the EU and IMF, and thus ensure further monetary aid if need be.

However the Euro's gains against the US Dollar quickly evaporated when German Finance Minister Wolfgang Schäuble, expressed that it was not absolutely certain that Greece would receive further bailout funding. Given that the single-currency has recently gained support from the notion that Greece will receive funding from the IMF and the EU, the Euro could be in for a major retracement if this is not the case. The Euro's decline was further compounded by ECB Vice President Vitor Constancio who, while delivering a speech in Italy, said the economic outlook for the euro-region remains weak leaving the currency to trade at a low of 1.4550 against the US Dollar.

The forecast stagnation in April's annualized Euro-zone retail sales are unlikely to support the Euro this morning, as the outcome is set to reinforce a weakened outlook for the economy. However a better than expected reading will provide the Euro with the means to retrace some of yesterday's loses. Germany's factory orders for April, which are due for release an hour later, has more potential to lift the single-currency as forecasts call for orders to increase by 2.00% month-on-month after having contracted by 4.00% in March.

While still reeling from last Friday's disappointing Non-farm Payrolls figure, price action for the US currency was largely mixed with economists seeing scope for a third round of Quantitative Easing (QE3) by the Fed in a bid to support the economy. However the US Dollar did benefit from Europe's sovereign debt woes through save haven trading, but it appeared as though markets favoured both the Japanese Yen and Swiss Franc over the Dollar, as a haven, which was evident in the Dollar's decline against both currencies.

Looking ahead the US will see another reasonably quiet docket with Fed Chairman Ben Bernanke making a speech in Atlanta being the key event to watch this afternoon. Bernanke's speech will be closely watched by traders for indications as to whether another round of quantitative easing will go ahead, if so then the Dollar is likely to suffer as it is a clear indication that the Federal Reserve believes the US recovery cannot be sustained without support.

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