Weekly Currency report

From Peter-John Theuninck, Currency Analyst at Baydonhillfx

Ahead of the highly anticipated UK Q4 GDP release the Pound largely range traded against a basket of currencies as wider market movements dominated the Pound’s movements. A fall in growth levels over the fourth quarter put Sterling under pressure as investors concerns over ongoing economic weakness triggered risk aversion towards the Pound. Testimony before parliament by Bank of England Governor Mervyn King did give Sterling some support but the effects were short term. King said that there were no signs that inflation expectations had moved up and that wage settlements were rising at a rate below what was needed to meet inflation targets. The BoE governor expressed uncertainty over whether further stimulus would be required to support the British economy which was a slight deviation from market opinion that sees further QE as almost inevitable.    

Risk appetite remained a central theme in the market throughout last week and the Euro enjoyed some support on the back of traders covering short-euro positions as sentiment towards the single currency remained favourable. Weaker German data had put some pressure on the single currency as fear of economic slowdown tempered demand for the Euro, but a shift in sentiment towards the Dollar due to change in tone by the US central bank meant the EU currency was able to maintain the majority of its gains.

Federal Reserve Bank Chairman Bernanke changed the tone of the US central bank somewhat last week to favour a more dovish stance by suggesting further quantitative easing could be considered if the US economy should shown signs of requiring added support. Expectations of additional stimulus and concern that the US economy was not recovering as well as had been thought were the primary Dollar negative elements impacting the US currency. US fourth quarter GDP data remained unchanged at 3.0% which was in line with expectations but it was the release of weaker employment figures, an area of concern highlighted by Bernanke, that kept the Dollar on the back foot as the week closed.

This Week

Economic activity indicators will be key in determining ongoing expectations for the UK recovery and this week sees the release of a number of such data figures. The PMI manufacturing and service numbers are expected to show continued expansion in the sectors of the British economy but the pace of growth is seen to be slowing further. The data is therefore more likely than not to reinforce expectations of a protracted recovery and continued underlying weakness to the UK economy that if left unchecked could destabilise Britain’s fragile economic recovery.  

The figures will carry added weight this week as they come ahead of the Bank of England’s (BoE) monetary policy meeting, scheduled for Thursday. The BoE is not expected to make any policy changes at this month’s meeting, leaving interest rates at 0.50% and the asset purchase program at a value of £325bln. Traditionally no statement will accompany the announcement but many MPC members have in recent weeks signalled their concerns over the slowing of the economy, so even with no statement is made a decision to leave policy unchanged could still be seen as a confirmation of sorts that future expectations have not changed. The events of this week’s will most likely have a negative impact on the Pound.

As always we also recommend that economic events in Europe and the United State be kept in mind as risk appetite and technical based trading is still likely to play an important role in determining the directions that currency markets may take.

The European Central Bank (ECB) is also due to meet this week and like the Bank of England they are not expected to make any policy changes. Interest rates have been forecast to remain at 1.0% at Wednesday’s meeting. Given the recent shift to a more dovish tone from the US Federal Reserve Bank, analysts are likely to take note of any divergence between the positions of the Fed and the ECB although it is unlikely the EU central bank will shift to a more hawkish position which leaves little room for increased optimism towards the Euro.

German economic data will be the secondary focus for the market with PMI manufacturing and services data scheduled to be release ahead of the ECB rate decision. Manufacturing activity in Europe’s largest economy contracted in February while the country’s service sector showed a marked slowdown over the same period. Analysts have forecasted no changes to the activity indices which will likely have investors react with caution and sell off the Euro ahead of the EU central bank meeting. The slowdown in economic activity across Europe has been a cause for concern as increased liquidity in the market and a ‘resolution’ to the ongoing debt crisis have become less of a focus.

After Federal Reserve Bank Chairman Ben Bernanke highlighted the employment sector as an area of concern for the US central bank and opened the door to further possible quantitative easing, analysts will be keen to see what the ADP employment report and non-farm payrolls data deliver. Economists are expecting a slight drop off in the number of new jobs created for March and coming on the back of Bernanke’s assessment the data could see traders pricing in a greater chance of QE3 from the Fed, which would put pressure on the Dollar.

The US Dollar’s status as a safe haven currency will continue to give the greenback some support throughout the week as market participants assess their appetite for risk and the state of the global economy.      

Economic Data