Foreign Exchange Daily Market Update 06/06/11

Last week's data out from the UK was largely disappointing, which led the Pound to trade lower against the Euro. There was mixed price action versus the US Dollar across the week, as the US try to deal with their own economic problems. Wednesday's UK mortgage approvals for April showed that lending was still subdued, while the first of the Purchasing Manager's Index (PMI) triplet, the manufacturing PMI, under performed for May. The PMI for the services sector also came in below expectations on Friday, to show a slow down in activity since April. Only the construction sector out performed the consensus rising from 53.3 to 54.0.

This week's calendar is looking very light indeed, with nothing major to be reported until Thursday, when the Bank of England (BoE) will be announcing this month's interest rate decision. With this being the first month that the Monetary Policy Committee (MPC) will be voting without the renowned hawk Andrew Sentance, the chances of a further shift in sentiment towards a rate-hike seem less likely. April's trade balance deficit will also be reported on Thursday, with expectations calling for the deficit to have narrowed since March. Friday will see April's industrial and manufacturing production figures announced which are set to show a slow down in production and could potentially weaken the Pound's standing. Lastly May’s Producer Price Index will close the week’s data set and could push up rate hike expectations should the market see a large growth rate than the forecasted 3.40% increase in prices.

The foreign exchange market has witnessed the Euro continue to gather strength, despite ongoing issues of sovereign debt. The single-currency's upward movement started on Monday with news that Greece would undertake another round of austerity measures in a bid to secure funds from the International Monetary fund (IMF) and the EU. The news overshadowed Germany's disappointing decline in unemployment by 8,000 individuals, but the Euro's rally was short lived as by Thursday Moody's downgraded Greece's credit rating by three notches and raised its risk of default to 50%. By Friday though the Euro had recovered, in part due to an upward revision in May's Services PMI for Germany and the Euro-zone overall, but mostly due to some devastating figures from the US, which saw the currency end the week at 1.4430 against the Dollar and 1.12 versus the Pound.

In contrast to the UK docket, there are a number of key European figures to watch for this week, the most important of which being Wednesday's 1st quarter Gross Domestic Product (GDP) reading for the Euro-zone. The figure is expected to remain unchanged at 0.8% growth from the previous quarter. A larger than expected increase in GDP will extend the Euro’s gain while weaker growth will push the currency lower. Market traders will then look towards the ECB's interest rate decision on Thursday, which could remain unchanged at 1.25% given previous commentary from ECB President Jean-Claude Trichet that higher borrowing costs could jeopardise the recovery in weaker European peripheries. However Monday's Producer Price Index (PPI) could raise rate hike expectations if inflation comes in above the 6.6% consensus and in turn the currency could receive a boost. Keeping with inflation, Germany’s Consumer Price Index (CPI) figures on Friday could potentially contradict the ECB’s decision to hold rates (if that is the central bank’s decision) if inflation comes in above the expected 2.40% increase. This is a very real possibility given that Germany’s economic growth has placed increased pressure on price growth.

Economic figures out from the US generated a bearish trend for the US dollar. After a slow start to the week May's consumer confidence index was published on Tuesday showing a drop in consumer sentiment from 66.0 to 60.8. The downbeat news continued on Wednesday when payrolls processor ADP reported that in May the US economy added a mere 38,000 jobs massively missing estimates for 175,000 to be added. Further to this manufacturing activity slowed in May according the ISM manufacturing index which fell to 53.5 from 60.4. However the greatest blow to the US economy came on Friday when the Labour Department announced that Non-farm Payrolls came in well below the consensus of 165,000 jobs with an increase of 54,000. This left the Dollar trading at 1.6420 on Friday against the Pound, with further loses being made against the other safe havens; the Japanese Yen and the Swiss Franc, while against the Australian, New Zealand and Canadian Dollars the US Dollar managed to close the week relatively unchanged from its open.

Meaningful economic data from the US will be in short supply this week leaving traders waiting until Wednesday for the first significant event, the Fed's Beige Book report. Given the recent flurry of weak economic data, the beige book is unlikely to paint a rosy picture for the state of the US economy, so its release could potentially push the Dollar lower. The Dollar could face further woes when Thursday's trade balance sheet is released for April. Economists believe that the US trade deficit will widen to $48.8 billion from $48.2 billion.