The week opened with the announcement by Chancellor of the Exchequer George Osborne who outlined the UK government’s spending plan for this year, confidence gained on Friday after the release of lower government spending figures remained intact ahead of Osborne’s speech. The Chancellor announced £6.25bln in savings to the created this year with £500mln earmarked for reinvestment into the economy. Osborne further said that tougher spending decisions would be needed in future but wanted an informed debate with the public and business on where those cuts would take place. Despite the assurances from the government, comments from Bank of England MPC member Miles dragged the pound lower as the central bank kept markets on an even keel. Miles warned that EU strains posed a risk to the UK economy and that inflation would start to fall to target over the next 6 months, dampening interest rate hike expectations. He also left the door open for the potential of further quantitative easing measures being introduced.

UK GDP q/q Q1 showed an upward revision to growth coming out at 0.3%, in line with expectation, and higher than the previous 0.2% estimated. While the data was supportive of the pound an upward trend took some time to take hold as the BoE minutes had already alluded to a possible upward revision. Analysts also warned that current growth figures were highly dependent on temporary factors which kept traders sensitive to the risk of future economic  weakness. Despite the words of warning traders did take heart for the improved figures and the pound remained well supported to close near the highs of the week against both the dollar and the Euro although it weakened slightly due to a marginal drop in confidence figures on Friday. Additional underlying support for cable came from a rebound by the euro versus the dollar as risk aversion periodically eased and oil prices pushed higher in the later part of the week.

The euro continues to struggle as concerns over the stability of the euro zone supported risk aversion. Despite the weekend meeting of Finance Ministers to discuss the EU debt crisis which boosted confidence, events in Spain reignited safe haven flows after the Bank of Spain took control of a savings bank. The move by the central bank was the latest in the bank’s attempts to restructure troubled mutually owned banks and stabilise the country’s financial sector. In addition to the continued fear of contagion to other EU member countries concerns have now been raised that the situation in Greece and Spain could dampened the momentum of growth for the Euro region as a whole.

With only minor data releases, fundamentals had little impact on the single currency. The impact of speculative trade was of greater influence however. German GfK Consumer confidence came out slightly lower than expected at 3.5 and HICP inflation data only met the markets consensus forecasts. Levels in the EUR/USD dropped below 1.22 which triggered speculators to buy back into the single currency as market became increasingly oversold. Gains on the back of these technical moves were limited though as rumours that China was looking to revaluate its EU debt holdings and uncertainty over the ability of EU banks to funds their balance sheets weighed on the Euro once again. Further euro depreciation came as US Treasury Secretary Geithner met with his German counterpart to discuss global restructuring of financial markets. The Euro weakened sharply after Geithner warned against policies that were counterproductive and would push activities outside of market oversight. Concern over recent regulatory crackdowns in Europe, namely the ban on the short-selling of certain assets, resurfaced and had speculators betting against the single currency once again.

Initially on the back foot the dollar quickly resumed its upward trend against the Euro in particular. Safe haven demand for the dollar was little changed due to ongoing concerns over the debt position of certain EU countries. Geo-political tension in Asia added to safe demand for the greenback after South Korea blamed North Korea for the sinking of a South Korean Naval vessel.

In conjunction with global uncertainty over Europe, US economic data boosted investors confidence in holding dollar denominated assets as the figures supported the view that the US economic recovery remained stable. US existing home sales rose to 7.6% in April, while new homes sales increased to 504K from 439K the previous month.  US durable goods orders also increased in April. The only event that resulted in notable dollar weakness was the drop in US GDP Q1 figures. Growth dropped to 3.0% while the previous estimate was revised down from 5.6% to 3.2% for the first quarter. Added to the weaker growth figures the oil spill in the Gulf of Mexico pushed oil prices higher weakening the US dollar further. Oil supply pressures as well as the potential financial impact of the oil spill on BP and the oil industry as a whole drove crude oil prices higher.

Next Week

Thin trading volumes on Monday will probably have some European traders pause for thought as range bound trading is most likely going to be the norm with holidays in the UK and US. There is a significant number of economic data releases and while risk aversion and sovereign debt concerns will not disappear, they are going to have less of an impact on currency markets as focus shifts to fundamental data. EU consumer confidence has the potential to allow the euro to recover last week’s losses on Monday if confidence improves although with traders still cautious due to the risk of sovereign debt, gains may be limited. UK PMI manufacturing and mortgage approvals data will the main focus on the local front although US data will dominate the markets. US employment data in the form of the ADP employment report and Non-farm payrolls data are the weeks key events. Stronger employment is considered to be a factor in determining the continued sustainability of economic recovery in the United States. Speculative trade on the euro will continue to add to external pressures from risk aversion  and data assessment, much as they did last week, although technical levels on EUR/USD may cap losses for the single currency.

Economic Data Releases