Currency Market Update 18/01/11

[PhilBen]

A lack of data and a market holiday in the United States yesterday traders focused on sentiment and non-economic data events for currency market direction.

The Euro fell 1.2% against the Dollar from its Friday highs as investors began to speculate that policy makers would potentially expand the European rescue fund. Thin volumes, due to the US holiday, saw the single currency come under further pressure from traders covering their euro short positions created after last week’s successful Spanish and Portuguese bond auctions. However, in early trade this morning the Euro appears to have pulled back some earlier losses against the Dollar as investors return to the ECB’s hawkish stance and the possibility of an interest rate hike by the European Central Bank.

Market anticipation of today’s UK CPI data helped to push the Pound to a 2-month high against the Dollar yesterday. The expectation that UK consumer price inflation would be shown to have risen further beyond the Bank of England’s 2% target and could thus force the bank to raise interest rates being the primary support factor. In November the rate of inflation of 3.3% surprised analysts. The fear then and now was that the increase in V.A.T to 20% and new energy tariffs coupled with increase in food costs could again push inflation higher. The interest rate market has already priced in a 25 basis point interest rate rise by the end of the second quarter with a 75 basis points rise expected by the end of 2011. By midday the Pound had climbed 0.3% against the Dollar to its strongest level since November 23 and climbed 0.9% against the Euro.

Sterling is trading higher this morning ahead of the UK CPI numbers after better UK housing data and improved consumer confidence figures were released overnight. Additional European data expected this morning is the German ZEW economic sentiment index and this afternoon we have Manufacturing data from the New York Fed, US trade data and from Canada the Central Bank’s interest rate decision.

Live IB rates at 10.07am UK
GBP – EURO 1.196
GBP - USD 1.604
GBP- AUD 1.606
EURO - USD 1.34

 

[PhilBen]

Sterling appreciated sharply yesterday morning after the release of higher than expected U.K. inflation figures, CPI y/y rose to 3.7% from 3.3% in December. Analysts had expected an increase in monthly price pressures but the surprise increase in the yearly numbers changed the markets policy expectations for the Bank of England. The U.K central bank last month altered its monetary policy stance slightly warning of concerns over inflation and the numbers released yesterday confirm this concern. Economist are now expecting a potential interest rate hike and no longer see any moves to introduce further quantitative easing.

The Euro continues to see support and recovered losses versus the Pound while appreciating further against the Dollar after the Dutch Finance Minister commented that the Euro group had rejected enlarging the E.U. rescue fund aimed at supported indebted E.U. regions. The comments support the European Central Bank’s more hawkish stance from last week.

U.S. data allowed for a short Dollar recovery after U.S. capital flows increased to $39bln from $15.1bln but gains were limited as traders continue to buy
Euros to cover the short positions created over the last few weeks due to concerns of sovereign debt contagion for Portugal and Spain.

An increase in the E.U. current account deficit this morning is putting the single currency under a bit of pressure in early trade and there is no further European data expected for today. In the U.K. employment figures are scheduled to be released while in the US mortgage and housing starts number are expected

Live IB rates at 10.44am UK
GBP – EURO 1.185
GBP - USD 1.597
GBP- AUD 1.591
EURO - USD 1.346

 

[numbergroup]

So which way do you think the dollar v EURO is going to move next, and why ?

 

[PhilBen]

No one really knows until after the event, but all things being equal the euro could be seen as the weaker currency and investors always like the usd as the safe heaven. Short term at least low 1.30s will probably be the avg. If Germany shows more discontent with the Euro zone and rumours start flying around, then we could see it drop dramatically.

 

[PhilBen]

The Euro has maintained its upward trend but suffered under a large degree of volatility after initially appreciating on the back of higher German inflation numbers. German PPI rose to 5.3% y/y from 4.4% but profit-taking on 1.35 ahead of the U.S. data release kept the Euro from advancing further against the greenback. U.S. weekly jobless claims and existing home sales both came out higher than expected and with stronger earnings results from Morgan Stanley pushed the U.S. Dollar higher across the board. Comments from the IFO economic institute that Greece should look to restructure its debt with creditor banks, having them renounce part of their yield return claims, boosted sentiment which remains in favour of the Euro and has kept the single currency supported in overnight trade.

The Pound followed movements in EUR/USD trade yesterday although gains versus the Dollar were capped in the morning session after the release of weaker U.K. industrial orders figures, the CBI trend orders index fell to -16 from -3 in January.

The Euro has appreciated ahead of the German IFO sentiment indices with better than expected figures extending the Euro rally across the board. The main focus for the Pound will be the release of U.K. retail data which is already weighing on Sterling as markets expected sales figures to come out lower than last month. There is no U.S. data scheduled for release.

Live IB rates at 10.23am UK
GBP – EURO 1.175
GBP - USD 1.59
GBP- AUD 1.613
EURO - USD 1.35

 

[PhilBen]

Profit-taking and slightly weaker economic data from Germany and Europe has pulled the Euro off of the 9 week high posted by the single currency against the Dollar and its 3 week high versus the Pound. German PMI manufacturing data this morning came out at 60.2 in January, previous figure was 60.7, while E.U. PMI manufacturing fell to 56.9 from 57.1 for the same period. Sterling continues to struggle, influenced by weaker data on Friday and movements in EUR/USD trade. U.K. retail sales fell to -0.8% m/m versus an expected -0.3% from 0.3% for December weighing on the Pound as concerns over economic recovery resurfaced.

There is no U.K. or U.S. economic data scheduled for release today leaving the Pound and the Dollar to trade at the mercy of investor sentiment and wider market movements. Markets will no doubt begin to price in tomorrow’s U.K. government spending and preliminary Q4 growth figures due to a lack of an alternative focus. Traders await the release of E.U. industrial production figures later this morning.

Live IB rates at 10.13am UK
GBP – EURO 1.174
GBP - USD 1.594
GBP- AUD 1.61
EURO - USD 1.357

 

[PhilBen]

A lack of UK or US data yesterday saw traders focused on activity in Europe as Germany continued to be the driving force behind the EU recovery. Yesterday saw the release of German and EU PMI data with both manufacturing and service sectors performing well. Investors also appear to be preparing for a significant policy response to the European debt crisis from the Finance Ministers meeting in Davos this week. Analysts have reported a sudden and dramatic shift in activity with significant reversals of Euro short positions. The single currency gained against the Pound and the Dollar throughout trade yesterday.

The Euro has hit a two-month high against the Dollar this morning after German GFK data showed consumer sentiment for February rising and investors begin to take a more hawkish view of Euro zone interest rates and worries about the euro zone debt crisis eased.

This morning we have the release of UK fourth-quarter GDP and Public Sector Net borrowing which may give some direction for Sterling. Recent comments from the Business Secretary Vince Cable have echoed wider market expectations that the GDP data today will show poor weather in the last quarter having influenced the lower Q4 figures. Later today from the US we have chain-store sales figures as well as consumer confidence and monthly house price data.


Live IB rates at 9.48am UK
GBP – EURO 1.161
GBP - USD 1.578
GBP- AUD 1.588
EURO - USD 1.359

 

[PhilBen]

The Pound began the day trading lower as markets priced in lower GDP expectations but a surprise contraction in the UK economy for Q4 pulled sterling sharply lower across the board. U.K. GDP Q4 q/q came out at -0.5% against a forecast of 0.5% and previous growth figures of 0.7% in Q3. Net borrowing figures improved more than expected but this positive data was offset by weaker total government borrowing data and had no effect on sterling levels.

German consumer confidence figures gave the single currency some support in early trade but a lack of economic data and focus on the Economic Forum in Davos saw the Euro trading in volatile ranges versus the Dollar. European debt concerns and the struggle governments will face to implement the reforms necessary to overcome the sovereign debt problem plagued the Euro.

Higher U.S. consumer confidence kept the Dollar supported ahead of last night’s ‘State of the Nation’ speech by President Obama and today’s FOMC rate decision. The Dollar weakened after U.S. bond yield fell on the back of news Obama proposes to freeze portions of Federal spending and the perception that the Fed would maintain a much easier monetary policy compared to the European Central Bank which is worried about high inflation expectations.

Crucial for Sterling will be the release of the Bank of England’s minutes from its last rate setting meeting this morning. There is no U.K. or E.U. data scheduled for today and in the U.S. only New Home Sales figures are expected before this evening’s Federal Reserve Bank rate decision.


Live IB rates at 10.28am UK
GBP – EURO 1.158
GBP - USD 1.586
GBP- AUD 1.591
EURO - USD 1.369