Weekly Currency report

From Peter-John Theuninck, Currency Analyst at Baydonhillfx

The signs of ongoing risk aversion was fairly obvious in the way the Euro traded last week, the single currency fell to a two year low versus the Dollar on the back of increased uncertainty over the debt positions of Italy and Spain. The German constitutional court was hearing complaints about the ratification of the ESM rescue fund and implementation of tough new budget rules and even though the results of the court’s decision could take several weeks to be announced the legal action unsettled the market.    

The minutes released by the US Federal Reserve Bank indicated the US central bank was quite happy to sit back and review economic fundamentals before deciding on whether more support is needed for its economy. Jobless claims last week indicated an ongoing positive trend in the US job market and thus lent added credibility to the Fed’s position on policy but that is not to say that the US central bank wouldn’t change its position if the situation called for it.

Sterling succumbed to risk aversion trading in EUR/USD and fell against the Dollar while it made gains versus the Euro. A lack of economic data release meant there was little independent support for the Pound and thus capped the UK currency’s upside potential versus the weaker Euro, resistance levels at 1.27 held firm for most of the week but the downgrade of Italy’s debt by ratings agency Moody’s allowed the Pound to break through those levels to close the week on a high note.

This Week

The risk appetite seen on the back of the better than expected China GDP figures has quickly worn off as markets prepare for this week’s events. Focus will be on US Federal Reserve Bank Chairman Ben Bernanke this week as he testifies before Congress Tuesday and Wednesday but UK investors will certainly be keeping a close eye on the Bank of England’s monetary policy minutes released on Wednesday and the public sector spending figures for the British government later in the week.

Italy and Spain remain under close scrutiny as yields on their 10-yr bonds remain uncomfortably high and have begun to influence credit agency’s who are voicing their concerns over sustainable debt levels. The Euro remains under pressure as a result of the ongoing uncertainty that exists in the market  over whether EU bailout funds will be required beyond what Spain has already been given to support its banking sector.

Economic fundamentals have in recent months shown a distinct softening in activity across all of the Euro-zone’s major economies, even Germany has become impacted more and more by the slowdown in demand from the rest of Europe. Safe haven demand for the Dollar is likely to keeping the Euro trading lower especially as Fed Chairman Ben Bernanke is testifying before Congress this week. Market participants will want to see what position the Fed will be taking on its monetary policy and what if any concerns they will express towards the EU debt crisis and the global slowdown. We are reminded that the European Central Bank cut its interest rates two weeks ago and adopted a dovish policy stance going forward, this change in the ECB’s position favoured the US Dollar but if the Fed follows suit we may very well see some of the shine on the Dollar begin the wear off.

The Pound will have a good deal of data and market events to trade from this week although the main point of focus will be on the release of the Bank of England monetary policy meeting minutes on Wednesday. The MPC minutes are not expected to hold any surprises on the UK central bank’s decision to keep interest rates unchanged at 0.50% but what traders will be most interested in is what discussion was had surrounding the £50bln increase in the BoE’s asset purchase scheme. The possibility exists that a three-way split vote might have occurred with one member likely to have considered a £75bln increase while some of the hawks of the MPC might have been more hesitant to increase quantitative easing by more than the £25bln.

UK CPI inflation data will be released on Tuesday, ahead of the minutes, and will go some way to guiding the market on future expectations for inflation as well as the likelihood of further stimulus measures being undertaken. At present there is no overall consensus on whether more stimulus will be needed but then the uncertainty over the EU debt problems will mean that market participants are equally unlikely to say none could occur either.

UK retail sales data and more importantly the UK publics sector net borrowing figures will round out the week, the hope of a more balanced outlook for Britain will largely depend on the MPC minutes but any improvement in debt levels or economic activity will certainly not be seen as a negative factor for the Pound.  

Safe Haven demand is ever present and this week is no exception, the main event for the US is the testimony by US Federal Reserve Bank (Fed) Chairman Ben Bernanke before congress but housing a employment data will not be overlooked. The housing and jobs markets are key indicators of economic stability for the Fed and the data released this week will be analysed in context with the Fed Chairman’s testimony. The Dollar is not expected to see any significant downside pressure unless Bernanke signals a clear intent from the US central bank that further action on stimulus is likely to be taken sooner rather than later.

Economic Data