Foreign Exchange Daily Market Update 08/06/11

The British Pound regained its footing against the US Dollar as negative sentiment continued to bear down on the Greenback following last week's poor economic figures with the currency pair reaching a high of 1.6471, making it cheaper to buy Dollars. With the economic data released from the UK so far looking bleak, namely Monday's report from the British Retail Consortium showing a 2.1% drop in retail sales for May, it is unlikely that the UK economy is propping up the Pound. Indeed if the Pound was strengthening then the GBP/EUR exchange rate would not have slipped to a low of 1.1174.

With today's docket having no economic data from the UK, the currency may continue to trade sideways against the US Dollar until Thursday when the Bank of England (BoE) will be announcing its monetary policy for the month. Forecasts call for the BoE to hold interest rates at the current level of 0.50% and maintain its stock of asset purchases at £200 billion. Although this position is highly expected, given that it is backed by the International Monetary Fund, the rate announcement could see the Pound weaken as market traders may scale back expectations that rates will rise later this year.

Yesterday's impressive data from the Euro-zone provided the Euro with the means to push forward its advance against the other major currencies. Retail sales within the Euro-zone grew at a pace of 1.1% annually instead of remaining flat as was forecasted by economic analysts. Further to this, Germany's factory orders rose above the consensus of 9.0%, to show an annualised growth rate of 10.5%. The strong data helped the Euro to rise against the US Dollar to a high of 1.4694 during the Asian trading session.

Euro-zone 1st quarter GDP figures headline the European trading session today with expectations calling for growth to remain unchanged at 0.80% quarter-on-quarter and at 2.50% annually. A downward revision of the figure would put a spanner in the works for any rate hike expectations from the ECB and could see the Euro weaken as a result. The opposite is also true with an upward revision having the potential to push the Euro higher against the other major currencies. Elsewhere on the docket Germany's industrial production figures for April are due for release, with the consensus calling for production to slow from 11.20% to 10.0%. However given yesterdays better than expected factory orders for the same period it's possible that production would have picked up in line with the increase in orders. If so the data will support the Euro, but if production comes inline with economic forecasts or slips below estimates then the Euro could tip lower.

In light of the spartan amount of data to come out from the US this week, foreign exchange traders looked to commentary from Federal Reserve officials in order to gauge the direction of future US monetary policy. According to Dallas Fed President Fisher, the central bank has "done enough if not too much" in terms of providing stimulus for the economy. The Atlanta head Lockhart sat in opposition saying that he was wary of tightening monetary stimulus given the "lack of conviction in this economy" as far as economic growth is concerned. But the official with the most weight behind his comments was of course Fed Chairman Ben Bernanke whose comments remained consistent with past statements, when he addressed bankers in Atlanta. The Chairman stated that with regards to inflation that "there is little evidence" that inflation is becoming "ingrained in the economy" and added that the Federal Open Market Committee (FOMC) sees that economic conditions "warrant exceptionally low levels for the federal funds rate for an extended period." Given that last week's jobs data was fairly weak, Bernanke said he would maintain the current level of stimulus until labour market conditions boost economic activity, but did see the need to expand the current stimulus package. With fears of a third round of quantitative easing being put to rest the Dollar made a brief revival to see GBP/USD to fall back below 1.64.

Economic data will continue to remain on the light side today with the key event being the release of the Fed's Beige book report. The report is unlikely to reveal anything ground breaking given that the currency exchange markets are already fully aware of sluggish jobs growth and the slowdown in manufacturing activity. Had there been anything new to reveal it is highly likely that Ben Bernanke would have covered this in his speech yesterday.