Foreign Exchange Daily Market Update 10/06/11

Yesterday the Bank of England announced their decision to hold interest rates at the historic low of 0.50%, and maintain the stock of asset purchases at £200 billion. Initially the rate decision had little effect on the currency, but as the market digested the increasingly unlikely prospect of an imminent rate hike, the Pound gave way and traded lower, with the GBP/USD exchange rate slipping to 1.6399. Market participants will have to wait until the 22nd June for the release of the meeting's minutes, which will also show the voting results, as once again the central bank refrained from releasing a policy statement. The Pound had seen gains earlier in the day with April’s visible trade balance reporting a better than expected reduction in the trade deficit, which shrunk from £7.708 billion to £7.389.


This morning’s industrial and manufacturing figures for April weakened the Pound’s standing against the other majors with the currency falling to 1.6265 against the Dollar and 1.1241against the Euro. Industrial production contracted by 1.7%, despite calls for output to remain flat, while manufacturing, which was expected to see a mere 0.1% decline fell by a staggering 1.5%. The data echoes the weaker Purchasing Manager’s Index readings seen earlier this month and paints a poor outlook for the UK economy. Also on the docket, Output Producer Prices came in as expected, with core inflation growing at 0.2% in May, down from 0.8% in the previous month. The slow down in price growth means that the Bank of England may retain their stance on monetary policy as the data supports their view that the current level of inflation is still a temporary factor that will die down eventually.

The Euro was down versus the US Dollar this Thursday despite the currency exchange market being given a signal by Jean-Claude Trichet that interest rates would increase in July. Following yesterday’s decision by the ECB to hold interest rates at 1.25%, ECB President Trichet used the term “strong vigilance” when referring to consumer prices, a key phrase that is usually followed by a rate hike at the next policy meeting. This would typically lift the Euro against the other currencies. However, Trichet went on to say that further tightening measures would follow a rate hike in July and that the central bank has lowered its growth forecasts for 2012. Trichet's comments sent the GBP/EUR exchange rate through the roof to peak at 1.1301 before falling back and holding near 1.1280 and maintaining a suitable environment to buy Euros.

With the ECB's head having signalled that a rate hike is on the cards for July, market trader's will be watchful for any economic indicators to support this move by the central bank and today's docket provides one such indicator: Germany's Consumer Price Index (CPI). CPI figures do have the potential to push up rate hike expectations, but unfortunately for the Euro, Germany’s CPI remained unchanged. Elsewhere on the docket, French industrial and manufacturing production for April came in weaker than expected. Industrial production actually contracted by 0.3% (although this is an improvement on March’s 1.1% contraction) and manufacturing increased by 0.2% missing estimates for 0.3% rise.

Thursday was a mixed bag for the US Dollar. Just before the open of the North American session the Dollar rallied following a greater than expected contraction in April's trade balance deficit which fell from a downwardly revised $46.8 billion to $43.7 billion, when forecasts had called for the deficit to widen to $48.8 Billion. This saw the Dollar rally and pushed the EUR/USD exchange rate to a low of 1.4478 and GBP/USD to 1.6358. The Dollar's rally was however restricted as initial jobless claims unexpectedly rose to 427,000 from 426,000. While it is only a small increase, it does however echo the rather poor employment figures that were released last week.

The big figure out this afternoon from the US will be May’s monthly budget statement which is expected to show that the budget deficit narrowed from April’s figure of $135.9 billion to $131.0 billion. The forecast outcome has the potential to push the Dollar higher as the data suggest that the US government is a step closer to balancing its spending against its income. However a higher than expected budget deficit would set the Dollar back.