Daily Forex Commentary

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Thursday, 17 May 2012 - Market Commentary

By Chris Applin

United States Dollar

GBP/USD sold off to a low of to a four week low of 1.5889 in the wake of the more dovish than expected Bank of England Inflation Report yesterday as the central bank governor Mervyn King noted that the UK recovery is likely to be slow and uncertain, with the latter exacerbated by the recent escalation of troubles in Europe. The banks near term inflation forecasts were revised higher whilst their growth forecasts were downgraded, leading to the inevitable conclusion that more QE may be needed to stimulate the UK economy at some point in the future. More positively we saw the UK unemployment rate decline to 8.2% from 8.3% the previous month, certainly an encouraging sign for the UK labour market. The USD eased off its recent highs yesterday as investors took some profits and the FOMC minutes from the central bank’s April meeting left investors no clearer on how the Fed intends to act in June when Operation Twist is due to end. The overall tone of the minutes was probably slightly more dovish than the market had been anticipating as the release noted that “several members” indicated that they believed more easing measures might need to be implemented if the US economic recovery stalled and the key point here is that the March minutes conceded that only a “couple” of members saw that more QE could be on the cards. Ultimately the minutes didn’t really cause much movement in the FX market, particularly with the USD still being dominated by risk sentiment. The economic data calendar is US-heavy today with initial jobless claims, Philadelphia Fed and leading indicators to look forward to. We have no UK releases today and with that in mind the bias of GBP/USD is probably skewed to the downside as events in Europe continue to roll on. GBP/USD opens this morning at 1.5902.

We expect a range today in the GBP/USD rate of 1.5870 to 1.6000

Euro

EUR/USD did stage a minor bounce off its 4-month lows below 1.2700 yesterday morning although range bound action persisted in what was predictably a very choppy day for the single currency. Greece received no respite from the glare of financial markets on Tuesday as market participants attempted to grapple with the fact that extreme uncertainty is likely to prevail until the next round of Greek elections in June. Investors reacted negatively to news that European Central Bank will temporarily be halting lending to certain Greek banks to limit its exposure to the troubled nation, prompting Spanish and Italian 10-year borrowing costs to spike to multi-month highs of 6.5% and 6.1% respectively, whilst German bunds revisited a record low of 1.44% as investors sought out safety amidst the Greek fall-out. GBP/EUR peeled away from its recent 3-1/2 year highs on Wednesday as the dovish Bank of England Inflation Report and the prospect of further QE weighed down on the UK currency but with the next round of Greek elections now due to take place in June it seems safe to assume that sterling will continue to grind higher against the single currency in the coming weeks. Today we will see Spain auction off 2015 and 2016 government bonds and the level of take up will certainly be scrutinized, but a more reliable indicator for sentiment towards Spain today might well be found via the nation’s equity index, IBEX, which tumbled to a fresh 9-year low yesterday. GBP/EUR opens this morning at 1.2494.

We expect a range today in the GBP/EUR rate of 1.2470 to 1.2560

Aussie and Kiwi Dollars

With risk aversion still the name of the game on Wednesday, gains in the AUD and NZD were hard to come by although both AUD/USD and NZD/USD were able to recover off their recently posted multi-month lows as investors looked to reopen long positions in the higher yielder’s amidst considerations that the selloff in both currencies had run its course. A consequence of the slightly stronger AUD and NZD and the more dovish than anticipated Bank of England Inflation Report was that GBP/AUD and GBP/NZD retreated back from their recent highs, falling to lows of 1.5974 and 2.0698 respectively as some mild profit taking took hold. We have no UK economic data today but as the AUD and NZD bounce back and the momentum in the GBP/antipodean crosses slows up it seems likely that it might be a quiet day for both GBP/AUD and GBP/NZD which open this morning at 1.6000 and 2.0767 respectively.

We expect a range today in the GBP/AUD rate of 1.5950 to 1.6100

We expect a range today in the GBP/NZD rate of 2.0720 to 2.0850

Data Releases

AUD: No data due

EUR: Spanish Q1 GDP 

GBP: No data due 

NZD: No data due

USD: Initial Jobless Claims, Philadelphia Fed, Leading Indicator

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