Foreign Exchange Daily Market Update 16/06/11

The Pound ended the day with the rate practically unchanged against the Euro; at 1.1372, but considerably lower against the US Dollar, falling from 1.6368 at the open of the European market, down to just under 1.6200 at the close of play. The influential data on the UK’s economic docket yesterday was all labour-market related. The Office for National Statistics (ONS) reported that claimant count increased by 19,600 to 1.49 million in May. Analysts had expected a rise of 7,000 and the figure represents the biggest rise since July 2009. However, the jobless total fell by 88,000 in the three months to April to 2.43 million - its biggest drop since August 2000. The UK Government is hoping that private firms will create jobs as posts are cut in the public sector were given a boost with news that employment in the private sector increased by 104,000 in the first three months of the year to 23 million jobs. Annual earnings increased by 1.8% in the year to April, down by 0.6% on the previous month, largely because of lower growth in bonuses in private firms.

Foreign exchange traders looking at today’s UK economic docket will focus solely on retail sales, with levels forecast to drop both monthly and annually, from 1.1% to -0.6% and 2.8% down to 1.5% respectively. A growth in retail sales is traditionally considered a good indicator of increase in consumer demand, and consequently economic growth, so should the figures report lower as expected, it doesn’t provide a positive outlook for the UK economy, so the Pound may well come under pressure.

Europe continues to face pressure in the currency exchange market in light of the struggle to find a suitable solution for Greece. This saw the GBP/EUR exchange rate move drastically overnight, up from 1.1370 to peak at 1.1460 in the early hours of this morning. Even with the rate falling back slightly to 1.1420 currently, it makes it a lot cheaper for UK based consumers who are buying Euros. In regards to the potential Greek bail-out: it is a German-inspired plan that suggests a further cash reserve may be needed by the Greek government if the European Central Bank refuses to accept its downgraded bonds as collateral. Such a plan to rework Greece's debts could force Euro-zone countries to fork out billions of extra Euros to avoid economic collapse. The European Commission warned an extra 20 billion Euros could be needed. Protests have broken out in Greece as a 24-hour anti-austerity strike by the country's largest labour unions crippled public services.

Former IMF chief economist Raghuram Rajan’s comments may go some way to settle the market as he stated that restructuring of Greece's debt looked increasingly probable as Athens lacked the political will to carry out widespread privatizations of state assets and budget tightening. "If the debt restructuring happens in a way that banks and markets are prepared for, even if not publicly but at least privately, it is very well containable," he said. But there was a stark warning from Rajan, with him saying "A restructuring which happens because the dialogue breaks down will be more complicated because that would suggest that there will be implications for Ireland, for Portugal and so on, and that could be more problematic down the line."

The European economic docket will be focused on inflation today, with Consumer Price Index (CPI) figures set for release at 10:00. The data may well give the market some doubt that an imminent rate-hike by the ECB is necessary, as CPI is set to hold unchanged at 1.6% month-on-month, and the annual figure is set to drop slightly from 2.8% down to 2.7%. Even though a figure of 2.7% annually would be above the ECB’s target level, a drop may indicate that the rise in inflation is temporary; and will fall naturally over time, consequently not requiring a further tightening of monetary policy to contain it.

The US Dollar strengthened greatly against both the Pound and The Euro yesterday, making it more expensive for UK consumers who are buying Dollars. The Greenback was helped by figures that reported a jump in consumer prices, both monthly and annually. The fact that CPI rose to 3.6% annually, and up from 1.3% to 1.5& month-on-month shows that consumer demand in the US is increasing, and should the inflation figures start to rise too fast, it will put pressure on The Federal Reserve to look at tightening monetary policy to prevent price growth becoming damaging.

The economic docket from the US today is comprised mostly of low- to-medium level market data, which includes building permit figures, along with housing starts and initial jobless claims. Slight increases in any of these figures would provide support to the US Dollar, as it would show a positive contribution to the economic picture. One figure that will be watched closely by the market is the Philadelphia Fed survey, which focuses mainly on manufacturing. An increase, which is predicted by the market, would indicate a positive outlook from manufacturers, and could see increased production levels, which is positive for the Dollar.

Mike Hood
KBRFX

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Foreign Exchange Daily Market update 07/06/11

With nothing on Monday's docket to guide price direction for the Pound, foreign exchange traders and market participants alike focused on the news that the International Monetary Fund (IMF) has backed Britain's austerity measures as put forward by Chancellor of the Exchequer George Osborne. The IMF said that "Strong fiscal consolidation is under way [in the UK] and remains essential to achieve a more sustainable budgetary position," and that the current economic weakness and above target inflation, which the IMF forecast to fall back to 2% over "reasonable time frame", are temporary. The Fund went onto say that it remains appropriate for the Bank of England to uphold the "current scale of monetary stimulus". This news supports forecasts that the BoE will maintain its current policy on Thursday when the Monetary Policy Committee (MPC) convenes to announce their rate decision. The IMF's support should have lifted the Pound but it seems the currency exchange market was more interested in the Fund's growth forecasts for 2011, which it lowered from 1.7% to 1.5%. This left the Pound to hit a low of 1.1185 against the Euro and 1.6340 against the Dollar.

Another quiet day for the UK will mean traders will have to hold their breath until Thursday's rate decision by the MPC and the accompanying trade balance data to get a sense of price direction for the Pound.

A better than expected Euro-zone Producer Price Index (PPI) reading for April lifted rate hike expectations, to see the Euro make some early morning gains yesterday as PPI rose by 0.9% over the expected 0.8%. Further to this the election of a new Portuguese government meant that Lisbon can implement the necessary budget cuts and austerity measures as specified by the EU and IMF, and thus ensure further monetary aid if need be.

However the Euro's gains against the US Dollar quickly evaporated when German Finance Minister Wolfgang Schäuble, expressed that it was not absolutely certain that Greece would receive further bailout funding. Given that the single-currency has recently gained support from the notion that Greece will receive funding from the IMF and the EU, the Euro could be in for a major retracement if this is not the case. The Euro's decline was further compounded by ECB Vice President Vitor Constancio who, while delivering a speech in Italy, said the economic outlook for the euro-region remains weak leaving the currency to trade at a low of 1.4550 against the US Dollar.

The forecast stagnation in April's annualized Euro-zone retail sales are unlikely to support the Euro this morning, as the outcome is set to reinforce a weakened outlook for the economy. However a better than expected reading will provide the Euro with the means to retrace some of yesterday's loses. Germany's factory orders for April, which are due for release an hour later, has more potential to lift the single-currency as forecasts call for orders to increase by 2.00% month-on-month after having contracted by 4.00% in March.

While still reeling from last Friday's disappointing Non-farm Payrolls figure, price action for the US currency was largely mixed with economists seeing scope for a third round of Quantitative Easing (QE3) by the Fed in a bid to support the economy. However the US Dollar did benefit from Europe's sovereign debt woes through save haven trading, but it appeared as though markets favoured both the Japanese Yen and Swiss Franc over the Dollar, as a haven, which was evident in the Dollar's decline against both currencies.

Looking ahead the US will see another reasonably quiet docket with Fed Chairman Ben Bernanke making a speech in Atlanta being the key event to watch this afternoon. Bernanke's speech will be closely watched by traders for indications as to whether another round of quantitative easing will go ahead, if so then the Dollar is likely to suffer as it is a clear indication that the Federal Reserve believes the US recovery cannot be sustained without support.

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.

Foreign Exchange Daily Market Update 01/06/11

Tuesday saw the Pound lose ground against the Euro and the US Dollar as the economic docket for the UK remained devoid of figures for a second day. Looking ahead to today's figures, April's mortgage approvals are set to slip from 47,600 approvals in March to 47,000 while net lending secured on dwellings is expected to rise from £0.4 billion to £0.7 billion. May's Purchasing Manager's Index (PMI) for the manufacturing sector could weaken the Pound's standing. A lower reading than the expected 54.1 index figure will most likely drive the currency lower, whilst a better than expected outcome could lift the gloomy outlook and push the currency higher.

The Euro saw some support on Tuesday when talks of Greece receiving a second bailout reached the foreign exchange market. According to the Wall Street Journal, German Officials eased off the pressure on getting Greece to restructure its debt before securing additional funds. As part of the deal Greece will have to accept additional austerity measures to receive further funding from the International Monetary Fund (IMF) and the EU. Among other requirements Greece will have to extend its public sector pay freeze, make cuts in civil service benefits and limit the nation's capital expenditure. Since this is a significant hurdle to have jumped, in securing additional funds, the news pushed the Euro exchange rate to a high of 1.4414 against the US Dollar and to 1.1420 against the British Pound.

Today final revisions to the German and Euro-zone manufacturing PMI for May headline the European docket. The index reading for Germany is expected to remain unchanged at 58.2 and the Euro-zone's reading to hold at 54.8. Any surprise downward revisions could see the Euro lose some of the gains it made yesterday, whereas a better than expected reading will extend its advance.

Yesterday's price action was mixed with regards to the US Dollar. Despite economic figures disappointing market traders, the Dollar made gains against the British Pound with the currency pair hitting a low of 1.6423. Whilst against the Euro, the Dollar managed to regain some ground after the single currency rallied following the possibility of Greece receiving a second bailout. On the data front Consumer Confidence fell in May to 60.8, the lowest level to be seen in six months. The index fell from an upwardly revised 6.6 in April, missing estimates for sentiment to improve to 66.6. Further to this the Chicago Purchasing Manager Index fell further than expected, slipping from 67.6 to 56.6 to mark its lowest reading since November 2009.

Economic figures due out today look set to provide a weaker outlook for the US economy and as such could stoke a reversal in risk sentiment on the currency exchange market, which lead to an appreciation for the Dollar through safe haven trading. To start with the ADP Employment Change survey is expected to show that the number of employed fell from 179,000 to 178,000 in May. Later into the session May's ISM Manufacturing index is estimated to fall from 80.4 to 57.2, indicating that manufacturing activity is cooling but still showing signs of growth.

Foreign Exchange Daily Market Update 31/05/11

The British Pound opened the week a touch above 1.65 against the US Dollar, following a fairly positive week of economic data in the UK, which saw Consumer Confidence rise by the second highest level seen since 1993. Add to this an increase in house prices, Government borrowing dropping by record levels, and the release of 1st quarter Gross Domestic Product (GDP) figures showing 0.5% growth, it has certainly helped the exchange rate no end.

It is unlikely though, that this week will follow a similar pattern, albeit due to the fact that the UK economic calendar is decidedly empty. Apart from Purchasing Manager Index figures for manufacturing, construction and services being released on consecutive days from Wednesday, the foreign exchange market will be more than likely to take direction from the European and US economies, and broader-based risk sentiment.

The Euro continues to face severe pressure, but has found support as an article published by the Wall Street Journal, suggested that Germany is considering ‘a rescheduling of Greek bonds to facilitate a new package of aid loans’, as it seems that the Euro-zone’s strongest economy accepts that without their help, the possibility of Greece running out of funds in the next month could have disastrous consequences for the rest of the member states.

In terms of monetary policy, the currency exchange market seems to be speculating that the chances of another rate-hike from The European Central Bank (ECB) in June are rapidly diminishing. With debt contagion worries still weighing heavily on policy-makers mind’s, the realisation is that whilst raising the interest rate once again would see a short term boost for the Euro currency, the knock-on effect could be a complete wipe-out of growth across the region.

The US Dollar could well benefit from any potential fall-out in Europe, and signs of weakness in the UK. The greenback is seen as one of the world’s ‘safe-haven’ currencies, and the longer there is indecision in regards to the EU, the IMF, and even the Bank of England, the dollar may well see welcome flows which benefit the exchange rate.

This coming week will be data-heavy for the US, so expect any surprises to make big moves in the foreign exchange market. Tuesday will see the release of Consumer Confidence figures for May, moving on to ISM Manufacturing figures on Wednesday, and concluding with the potentially market-moving Non-Farm payroll figures on Friday. All of these data events are seen by the market as having high-importance in terms of the overall health picture of the US economy, particularly key components such as the manufacturing and labour markets, so traders will be exercising caution, looking for any surprises.

Foreign Exchange Daily Market Update 18/05/11

The Pound saw a sharp appreciation in the currency exchange markets yesterday morning, following a bigger than expected rise in UK consumer prices. The data showed UK CPI at a 2 and-a-half year high of 4.5%, beating analyst’s estimates for a reading of 4.2%. However, the currency pared its gains later on as investors acknowledged higher inflation for now was unlikely to lead to an interest rate rise before year-end. Jeremy Stretch, currency analyst at CIBC commented ‘’ There were rumours of a strong figure around 4.4 percent, but it's higher than that’’, but added ‘’ Sterling hasn't really been able to push on after the knee-jerk reaction’’.

In a letter to the UK Treasury, Bank of England (BoE) Governor Mervyn King said that trying to bring inflation back to target quickly (by raising the key interest rate) would risk harming the economy and undershooting the central bank's 2.0 percent target in the medium term. Rate-setter Ben Broadbent, who will replace one of the most hawkish members of the Monetary Policy Committee (MPC), Andrew Sentence next month, told the government's Treasury Committee there remained "huge risks" both to raising or not raising rates, adding that he would have broadly followed the BoE's direction on policy, suggesting he does not share Sentance's strong arguments for raising rates.

This morning saw the release of the BoE’s minutes from the last policy meeting. There was little surprise when the minutes revealed no change in voting for either the key interest rate, or the central bank’s asset purchase programme; the MPC members voting 6-3 and 8-1 for the maintaining of the current interest rate and asset purchase target respectively. This news was closely followed by UK unemployment figures, which showed that the number of unemployed fell for the 3 months to the end of March by 36,000 to an overall figure of 2.46million. This change leaves the UK unemployment rate lower at 7.7%, down from 7.8%, but the claimant count actually rose from 4.5% to 4.6% for April.

The Euro currency has been on a downward trend through the early part of this week, particularly against The Pound, and yesterday’s disappointing ZEW Economic Sentiment survey results for Germany and the Euro-zone as a whole did little to provide the region with a boost. Turbulent times are ahead for the region, with IMF chief Dominique Strauss-Kahn currently behind bars at the Rikers Island facility in New York, facing charges of alleged sexual assault. His incarceration has thrown one of the world’s most powerful financial institutions into chaos, with market experts predicting that it could have larger ramifications for the European and global economy, and in turn the foreign exchange markets. Strauss-Kahn was the strongest voice behind muscular but often unpopular efforts to prevent debt defaults in Euro-zone nations, including Greece and, more recently, Portugal. The IMF’s temporary head, John Lipsky, is a highly respected former U.S. Treasury official and one-time JPMorgan Chase executive. But he’s not nearly as well-known in the political world, causing many to wonder whether the IMF will falter in making the case for widely shared contributions to financial rescue efforts.

The US Dollar weakened against most of its major counterparts during the overnight trade, but to be regaining its footing as investors scale back their appetite for yields. The dismal report for US housing starts yesterday and build permits may well have sparked a rise in risk aversion, and the rebound in the Dollar may gather pace, benefiting once more from its safe-haven status. However, the Federal Open Market Committee is scheduled to deliver its policy meeting minutes this evening. Any comments from the central bank are likely to heavily influence rate movement and we may see Chairman Ben Bernanke continue to highlight the ongoing weakness within the real economy as he aims to encourage a sustainable recovery, with chances of an interest rate-hike whilst the recovery remains frail remaining increasingly unlikely.

Foreign Exchange Daily Market Update 17/05/11

Despite yesterday's lack of data the Pound managed to rebound from a low of 1.6158 against the US Dollar and to test levels of 1.6250, while at the same time the currency ended the day lower against the Euro at 1.1440 down from its early morning high of 1.1505.

Today, the UK's docket will focus on inflation. The headline figure, the Consumer Price Index (CPI) was expected to show that prices rose annually by 4.1% in April and that the core index was to hold steady at 3.2%. However inflation came in above these expectations with the core index reaching 3.7% and the total CPI reading hitting 4.5%. The Bank of England has repeatedly stressed that higher food and energy costs are temporary and will die down, but with the central bank forecasting that CPI will rise to 5% this year, an interest rate hike may well be on the way. The outcome will raise expectations that the MPC's last vote count will show at least 4 members voting for some form of a rate hike, but traders will have to wait until Wednesday for the release of the minutes to May's policy meeting.

The FX market seemed to have little reaction to yesterday's Euro-zone consumer price index which rose at an annualized rate of 2.8% April to meet expectations, with core price inflation coming in above the consensus with 1.6% growth. At the same time, the region's trade surplus was larger than expected with non-seasonally adjusted balance showing a surplus of €2.8 billion. The currency also remained stable in the face of IMF Managing Director Dominique Strauss-Kahn being arrested on sexual assault charges. Strauss-Kahn was scheduled to attend the EU Finance Minister's Summit being held in Brussels today, but Deputy MD Nemat Shafik has gone in his place. The summit had been called to discuss, among other things, the Greek bailout package, with finance ministers asking the nation to sell assets and deepen its spending cuts in order to win an extension of its aid package to €110 billion. Finance ministers also agreed to endorse Portugal's €78 billion bailout package, but the package still requires approval by all euro-area governments, and is expected to run over a 3-year period if approved. The EU Finance Ministers' summit continues for a second day today.

Looking at today's scant line up, economic confidence is expected to have fallen across Germany and the Euro-zone in the month of May, according to forecasts for the ZEW surveys. Economic analysts foresee the index slipping from 19.7 to 17.3 in the Euro-zone, while the German reading should fall to 4.5 from 7.6. As sentiment weakens in the Euro-zone, the outcome has the potential to weigh on the Euro exchange rate making it cheaper to buy Euros.

During a speech in Washington, the Fed Chairman Ben Bernanke suggested that the US government should fund research and development. The Chairman believed that this would boost economic growth in America, while also supporting science through education. Notably Bernanke refrained from commenting on the outlook for the economy or monetary policy. On the data front, the New York Fed's Empire manufacturing index showed that manufacturing activity grew at a slower pace compared to April, as the index fell from 21.70 to 11.90, missing expectations for 19.70 reading. This was then followed by a disappointing NAHB housing market index which held at 16, missing calls for a print of 17.

The week's first round of US housing market data makes an appearance today with building permits set to rise by 0.3% in April to an annualized rate of 587,000, with housing starts for the same period expected to pick up 3.5%. A small increase in building permits would highlight the weak state of the US housing market.