Foreign Exchange Daily Market Update 14/06/11

Monday's economic docket from the UK was extremely light; however this did not stop the Pound from making some headway against the US Dollar. The GBP/USD exchange rate picked up to a high of 1.6343 by 14:00 BST, making it cheaper for people who are buying Dollars; before heading back towards 1.63. The currency pair received a boost following the release of the Bank of England's (BoE) quarterly inflation report in which the central bank's Chief Economist Spencer Dale said that long-term inflation expectations remained stable. However Dale went onto say that shorter-term inflation expectations were more difficult to gauge and remain "a key area of concern".

May's inflation figures take precedence on the economic docket today, with the headline figure expected to post an annualised growth rate of 4.5% in May, unchanged from April's reading. The core index is expected to show a slight slowdown in price growth, at 3.5%, down from 3.7%. With inflation expected to remain unchanged from the previous month, the BoE is unlikely to face any further pressure to raise interest rates. Even if inflation grew at a faster than expected pace; a result that would usually see increased talk of an interest-rate hike to curb 'dangerous' levels of growth, the currency exchange market is unlikely to react as the BoE has already received support from the International Monetary Fund (IMF) for its choice of appropriate monetary policy, and the view that above-target inflation in the UK is temporary. With rate expectations falling, the Pound could face headwinds and subsequently trade lower against the other major currencies.

In light of on going sovereign debt fears, the Euro managed to end a three day decline against the US Dollar, much to the surprise of foreign exchange traders. The EUR/USD exchange rate managed to push through to 1.44 despite the European Central Bank (ECB) President Jean-Claude Trichet and German Finance minister Wolfgang Schaeuble being unable to agree on the role in which investors will play in the Greek bailout, with Schaeubles pushing for creditors to pay some of the cost, while Trichet believes this could be an enormous mistake. While the disagreement remains unresolved the IMF has threatened to withhold its share of Greece's original bailout package. Such an outcome would be hugely detrimental to Greece and could very well shake up the whole European economy. Adding salt to the wound, credit ratings agency Standard and Poor's lowered Greece's credit rating from B to CCC given the increase likelihood of the nation defaulting on its debt. While the Euro continued to be uninhibited by this news when it came to the US Dollar, the same wasn't true of the GBP/EUR exchange rate which hit 1.1362 at the open of the US session.

Today the European docket will be almost entirely empty of meaningful economic data, but that doesn't mean that the day will be uneventful. Given the threat that the IMF gave on withholding part of Greece's bailout package, European finance ministers have called for a special meeting to be held. If a compromise is reached then the Euro could well rally as the outlook for the region improves. However, failure to reach a suitable agreement could put serious pressure on the Euro, and make the currency exchange rate more favourable for buying Euros.

The three day rally that the market saw on the US Dollar at the end of last week came to a stop on Monday. A lack of meaningful data on the US docket meant left the currency open to risk sentiment, and consequentially the currency traded lower against the other majors as traders regained their appetite for risk. The Dollar made its greatest losses against the Japanese Yen and the Swiss Franc, while the US Dollar was down 0.19% against the Canadian Dollar during the Asian session as well as being down against the Australian and New Zealand Dollars.

This afternoon's session could see the Dollar extend its losses as May's advance retail sales are expected to contract by 0.5%, a sharp reversal compared to April's 0.5% increase. Further to this, interest rate hike expectations are likely to fall given that the month-on-month reading for the US Producer Price Index is expected to slow from 0.8% in April to 0.1% in May.