Foreign Exchange Daily Market Update 13/06/11

The British Pound had a tough time against the US Dollar over the course of last week. The currency slipped against the Dollar early in the week when the International Monetary Fund (IMF) lowered its growth forecasts growth forecasts for the UK in 2011 from 1.7% to 1.5%. However, the Fund did support the UK government's austerity measures; saying that it remains ‘’appropriate’’ for the Bank of England (BoE) to uphold the "current scale of monetary stimulus". The comment lowered rate hike expectations amongst foreign exchange traders, with the drop in expectation reinforced on Thursday when the BoE held the benchmark interest rate at the historic low of 0.50% and asset purchases at £200 billion. A negative outlook was reiterated for the Pound on Friday, when it was reported that both industrial and manufacturing production was down in April. 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 (PMI) readings seen earlier this month and paints a poor outlook for the UK economy. This left the GBP/USD exchange rate to close the week at a low of 1.6220.

This week; Consumer Price Index (CPI) figures for May are due for release on Tuesday, but with the BoE expected to maintain its current monetary policy for most of the year, a better than expected reading of 4.5% may not stoke an appreciation in the Pound. However there may be some optimists in the currency exchange market who may feel differently, so a move to the upside is still possible. Employment figures follow on Wednesday with the number of people seeking jobless benefits claims expected to rise by 6,500 in May, with the claimant count rate expected to hold at 4.60%. The ILO unemployment rate is expected to hold at 7.7%. Should the figures come in as expected, it doesn’t present a hugely encouraging result, but any surprises could spark a movement in the Pound. A slowdown in retail sales from April to May could see the Pound trading lower on Thursday, where it may remain lower against the other majors, as Friday's docket remains bare and therefore unlikely to support the Pound.

A mix of sovereign debt fears and poor economic data hurt the Euro's standing against the other major currencies last week. The Euro had started well with rate hike expectations rising on Monday morning when April's Producer Price Index (PPI) grew by 0.9% month-on-month ahead of a 0.8% forecast. The rally was quickly reversed though when German Finance Minister Wolfgang Schäuble expressed that it was not absolutely certain that Greece would receive further bailout funding. Tuesday's Euro-zone retail sales figures and Germany's factory orders both came in above the consensus reading for April, supporting the single currency until Wednesday; which proved a dire day in terms of sentiment for the Euro-zone. A contraction in Germany's exports for April, coupled with weaker industrial production weighed on the Euro, with further negative sentiment coming in the form of a Reuters article saying that the EU, IMF and ECB would not provide further aid unless Greece could resolve under-financing in its adjustment programme.

The Euro continued to slide despite ECB President Jean-Claude Trichet using the key phrase "strong vigilance", in his post rate decision conference on Thursday, to signal a strong likelihood that rates would rise in July. The phrase was used by the central bank's head following the ECB's decision to hold rates at 1.25%, in line with expectations. 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. The news kept the Euro under pressure so that by Friday the GBP/EUR exchange rate breached the 1.13 barrier, making conditions better for buying Euros.

European data will be on the thin side this week, with the first item of note being Wednesday’s release of industrial production for the Euro-zone. The data may push the exchange rate lower as forecasts call for production to contract by 0.2% in April. Thursday's Euro-zone CPI readings could allow the Euro to regain any potential losses if inflation comes in above the forecast 2.7% annual growth rate, while an improvement in the accompanying employment rate could see further gains. However the Euro looks set to end the week on a bad note as April's Euro-zone trade balance is expected to see a trade deficit of 1.9 billion Euros.

In what was an extremely quiet week for the US in terms of economic data, the US Dollar performed well. The Greenback benefited from a drop in rate hike expectations for both the UK and the Euro-zone, while Europe was further hampered by trying to resolve Greece's debt issues. A speech in Atlanta by Fed Chairman Ben Bernanke and Wednesday's Fed Beige Book report were the most significant events to take place on the US calendar. On Tuesday the Fed Chairman put fears over another round of quantitative easing to rest when he said he would maintain the current level of monetary stimulus until labour market conditions boost economic activity, but did see the need to expand the current stimulus package. Bernanke went onto say that the US economy was still growing, albeit at a slightly slower pace than previously, and his comments were backed up by the Fed's Beige Book stating that economic conditions "warrant exceptionally low levels for the federal funds rate for an extended period." Finally, on Friday, the Dollar ended the week on a high note when May's monthly budget statement reported a smaller than expected budget deficit, allowing the EUR/USD exchange rate to fall below 1.6350 as the Dollar rallied against the other majors.

This week’s US docket will start with Tuesday's PPI figures for May. Forecasts call for factory gate inflation to fall slightly from 2.8% to 2.6%, while the core index (without food and energy prices) is expected to remain at 2.1%; indicating that food and energy prices may be on the way down after being elevated for so long. Advance retail sales figures will accompany the PPI, but could push the Dollar lower as sales are set to contract in May.

Wednesday's CPI readings seem set to contradict the earlier PPI figure, as consumer inflation is set to rise from 3.2% to 3.4%, potentially bolstering the Dollar through rate hike expectations. Further to this June's Empire Manufacturing index and May's Industrial Production figure are expected to improve. Falling jobless claims and a rise in Housing starts could see the Dollar strengthen on Thursday, although the expected decline in Building Permits may cloud the picture. Lastly, Friday's University of Michigan confidence index could weaken the Dollar, as consumer sentiment is expected to fall in June, while May's Leading Indicators composite index is expected to improve by 0.3% and could potentially soften the Dollar's decline.