Foreign Exchange Daily Market Update 25/05/11

The British Pound performed well against the US Dollar yesterday, reaching a daily high of 1.6208, and against the Euro, closed the day where it had started at 1.1473. This was despite a worse than expected budget deficit for April. According to figures released by the Office for National Statistics (ONS), public sector net borrowing dropped to £9.95 billion, down from £17.88 billion. However, it was not as low as analyst's expectations for £6.5 billion. The outcome highlights the difficulty that the government faces in cutting back spending. The Pound performed fairly well despite more negative news, with credit ratings agency Moody's stating that they are reviewing their ratings on government supported banks, which include Lloyds and RBS, as it is believed that any withdrawal of government support would weaken their credit worthiness.

1st quarter GDP figures headline the UK's economic docket today. Preliminary readings showed that economic growth remained unchanged at 0.5% since the 4th quarter of last year to match estimates, while annually economic growth was at 1.8%. The outcome means that UK economy hasn't grown since the third quarter of last which is clearly poor sign for the UK's recovery. The breakdown of the GDP total revealed some mixed results with private consumption falling by 0.6% missing expectations for 0.1% increase. Imports were expected to recede by 0.7% but fell by 2.3%, and exports beat expectations by growing at rate of 3.7% against the 2.1% consensus.

Against the Dollar the Euro followed a similar path to the Pound, with the EUR/USD exchange rate pushing up to levels above 1.4130 by the middle of the US session. The Euro enjoyed a rally following the publication of Germany's IFO business confidence surveys. The data showed that the short-term outlook German firms had on current market conditions remained relatively unchanged from last month's reading of 114.2. However the 6-month forward looking index was slightly lower at 107.4 down from 107.7 indicating that businesses see risks to the economic recovery over the longer-term as the global economy slows.

In what will be a light day in terms of European figures the currency exchange market has already seen the result of Germany's forward looking consumer confidence survey, which came in just below estimates at 5.5 instead of 5.6. The data suggests that German consumers are becoming increasingly anxious, which could be caused by higher prices (notably food and fuel prices) or perhaps the debt woes of other Euro-zone member states such as Greece, and the potential impact that could have on their lives. The remainder of the docket will look at Italian retail sales which are set to tick lower in March and April's French jobseekers total, which is set to drop slightly, indicating a small improvement in the French labour market. .

The Dollar was broadly weaker against the other majors on Tuesday, as risk appetite settled back into the foreign exchange market. The US currency should have gathered strength as New Home Sales in April grew at an impressive rate of 7.3%, the highest rate of growth since December. The outcome overshot expectations for a 1.7% increase in the sale of new homes and brought the annualized total up to 323,000 units. Elsewhere on the docket the Richmond Fed manufacturing index fell sharply to -6 from 10 in May, greatly missing expectations for the index to edge lower to 9.

Today's docket contains more US housing market figures with March's House Price Index expected to show that the value of US homes fell by 0.5% month-on-month. April's durables goods orders have the potential to bring the Dollar lower, as forecasts call for a contraction of 2.5% following March's increase of 4.1%. Since durable goods are usually quite expensive, a slowdown in the number of orders placed is indicative of weaker consumer confidence and tighter credit conditions. Overall the docket looks set to weaken the US Dollar if the data comes in at expected levels, pushing the rate of exchange up on the GBP/USD and EUR/USD pairs.

Foreign Exchange Daily Market Update 23/05/11

Last week's mix of economic figures produced some choppy price action in the currency exchange market as far as the British Pound was concerned. The currency saw gains on Tuesday when it was announced that Consumer Prices rose by 4.5% year-on-year to beat analysts' expectations for a 4.1% increase. The higher than forecast inflationary data stoked expectations that the Bank of England may raise interest rates later this year, and that policy makers will have take a more hawkish stance towards monetary policy. However on Wednesday, the MPC's minutes showed that the vote to maintain the current base rate of 0.5% remained unchanged at 6-3, with Andrew Sentance, Martin Weale and Spencer Dale being the three to vote for a rate hike. Despite the minutes showing that inflation is expected to hit 5%, most policy makers saw risks to the economic recovery if rates are raised too quickly. As rate hike expectations faded the Pound slipped to this week's low of 1.6105 against the Dollar. The Pound's decline was further aided by April's jobless claims rising by 12,400 in April instead of remaining unchanged as economists had expected. But the Pound didn't remain subdued for long, and received a welcome boost on Thursday with higher than expected retail sales figures for April showing month-on-month growth of 1.1% ahead of the estimates for a mere 0.8%.

A light week of economic figures lies ahead for the UK, which doesn't start until Tuesday when April's Public sector finances are published. Forecasts call for government borrowing to fall to £4.4 billion down from £16.4 billion and the outcome has the potential to lift the Pound if forecasts are correct. The big figure of the week though is the Office for National Statistic's preliminary reading for first quarter GDP. Economists believe that the UK's growth rate will stagnate at 0.5%. If this forecast is correct, it will mean that the UK has not grown since the third quarter of last year, and will most likely result in Pound's decline.

The Euro put in a strong performance for much of last week, making gains against both the US Dollar and the Pound. At the start of the week, a summit of European finance ministers was being held in Brussels. Finance ministers 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. With regards to Greece, the summit asked the nation to sell assets and deepen its spending cuts in order to win an extension of its aid package to €110 billion. However the Greek debt crisis has caused some controversy among member nations, as there is some discussion over whether debt restructuring is even a possibility for Greece. The uncertainty over Greece's future meant that on Friday the Euro slipped massively from a high of 1.4345 to below 1.42 against the US Dollar, while against the Pound the Euro ended the week at 1.1476.

On the data front, the single-currency benefited early on from a better than expected Euro-zone trade balance surplus in March, with a figure of €2.8 billion, rising from the previous reading of - €3 billion. On Wednesday the ZEW economic sentiment gauge underperformed for both Germany and the Euro-zone but the figure still remained positive. Lastly, Germany's Producer Price Index grew at a pace of 1.0% month-on-month beating forecasts for 0.6% and lifting expectations that the ECB may raise interest rates for a second time this year.

European figures dominate the foreign exchange market this week by sheer volume alone, the big figure of which being the final revisions to Germany's first quarter GDP. The preliminary reading of 1.5% is expected to remain unchanged. However while Germany's economic growth should prove to be a boost the value of the Euro there are a number of economic factors that point toward a weakened outlook for the region. On Monday Purchasing Manager Indexes (PMI) for Germany and the Euro-zone point to slowing growth in both manufacturing and services sectors, on Tuesday Germany's IFO business sentiment readings are also expected to tick lower from April. Further to this, Wednesday will see Germany's forward looking consumer confidence survey by market researcher GfK, with positive sentiment forecast to fall in June, and on Friday the Euro-zone economic confidence survey for May is expected to follow down a similar path. Potentially this week could lead the Euro lower if confidence in the region fails.

Housing market woes weighed on the Dollar on two separate occasions in the last week. On Tuesday both building permits and housing starts for the April came in below estimates with a contraction of 4.0% and 10.6% respectively. Thursday's existing home sales figures for the same period showed a 0.8% contraction. Further to this May's Empire manufacturing figure, April's Industrial Production, the Philadelphia Fed index and last the April's Leading Indicators composite index all pointed to a weaker production outlook for the US. However, by Friday, despite a lack of economic data, the Dollar regained some ground against the Euro as sovereign debt fears made room for gains to be made against the single-currency.

US housing data will be on the cards once again this week when on Tuesday April's new home sales are expected to slow to 1.7% growth down from 11.1% in March. However with last week's housing data coming in below estimates, there is a very good chance that traders will see the same outcome. This will then be followed by Friday's pending home sales which are set to decline by 1.0% month-on-month. Should this happen then the Dollar should weaken against the other majors. April's forecast contraction in Durable Goods Orders could also weigh on the Dollar, as well as the expected decline in house prices in March. By Thursday the Dollar could finally get some respite when the annualized first quarter GDP figure crosses the wire showing that the economy grew by 2.2%. Lastly income and spending estimates may leave the Dollar trading lower yet again, as forecasts call for the growth of personal income to slow to 0.4% from 0.5% and for spending slow to 0.5% down from 0.6%.