Foreign Exchange Daily Market Update 14/06/11

Monday's economic docket from the UK was extremely light; however this did not stop the Pound from making some headway against the US Dollar. The GBP/USD exchange rate picked up to a high of 1.6343 by 14:00 BST, making it cheaper for people who are buying Dollars; before heading back towards 1.63. The currency pair received a boost following the release of the Bank of England's (BoE) quarterly inflation report in which the central bank's Chief Economist Spencer Dale said that long-term inflation expectations remained stable. However Dale went onto say that shorter-term inflation expectations were more difficult to gauge and remain "a key area of concern".

May's inflation figures take precedence on the economic docket today, with the headline figure expected to post an annualised growth rate of 4.5% in May, unchanged from April's reading. The core index is expected to show a slight slowdown in price growth, at 3.5%, down from 3.7%. With inflation expected to remain unchanged from the previous month, the BoE is unlikely to face any further pressure to raise interest rates. Even if inflation grew at a faster than expected pace; a result that would usually see increased talk of an interest-rate hike to curb 'dangerous' levels of growth, the currency exchange market is unlikely to react as the BoE has already received support from the International Monetary Fund (IMF) for its choice of appropriate monetary policy, and the view that above-target inflation in the UK is temporary. With rate expectations falling, the Pound could face headwinds and subsequently trade lower against the other major currencies.

In light of on going sovereign debt fears, the Euro managed to end a three day decline against the US Dollar, much to the surprise of foreign exchange traders. The EUR/USD exchange rate managed to push through to 1.44 despite the European Central Bank (ECB) President Jean-Claude Trichet and German Finance minister Wolfgang Schaeuble being unable to agree on the role in which investors will play in the Greek bailout, with Schaeubles pushing for creditors to pay some of the cost, while Trichet believes this could be an enormous mistake. While the disagreement remains unresolved the IMF has threatened to withhold its share of Greece's original bailout package. Such an outcome would be hugely detrimental to Greece and could very well shake up the whole European economy. Adding salt to the wound, credit ratings agency Standard and Poor's lowered Greece's credit rating from B to CCC given the increase likelihood of the nation defaulting on its debt. While the Euro continued to be uninhibited by this news when it came to the US Dollar, the same wasn't true of the GBP/EUR exchange rate which hit 1.1362 at the open of the US session.

Today the European docket will be almost entirely empty of meaningful economic data, but that doesn't mean that the day will be uneventful. Given the threat that the IMF gave on withholding part of Greece's bailout package, European finance ministers have called for a special meeting to be held. If a compromise is reached then the Euro could well rally as the outlook for the region improves. However, failure to reach a suitable agreement could put serious pressure on the Euro, and make the currency exchange rate more favourable for buying Euros.

The three day rally that the market saw on the US Dollar at the end of last week came to a stop on Monday. A lack of meaningful data on the US docket meant left the currency open to risk sentiment, and consequentially the currency traded lower against the other majors as traders regained their appetite for risk. The Dollar made its greatest losses against the Japanese Yen and the Swiss Franc, while the US Dollar was down 0.19% against the Canadian Dollar during the Asian session as well as being down against the Australian and New Zealand Dollars.

This afternoon's session could see the Dollar extend its losses as May's advance retail sales are expected to contract by 0.5%, a sharp reversal compared to April's 0.5% increase. Further to this, interest rate hike expectations are likely to fall given that the month-on-month reading for the US Producer Price Index is expected to slow from 0.8% in April to 0.1% in May.

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.