Currency Blog | Daily FX Rates & News | Foreign Exchange Specialist | Ashley Ingle | Excel Currencies (ECFX)

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The UK dominates in what is otherwise a quiet day for economic data. The pound is still tied to larger fundamental concerns that cover the nation’s economic health, burgeoning deficits and excessively easy monetary policy. Such broad-based topics are difficult to adjust short of sweeping policy reform or a dramatic shift in underlying investor sentiment; but consistent economic data can slowly put the outlook back on course or further diminish the currency’s recent recovery. Data released early in Tuesday’s Asian session, would do little to bolster confidence in the sterling. The RICS House Price Balance for February suffered its sharpest decline in 22 months when the annual reading slowed to a 17-percent pace of growth. The UK’s housing market has shown considerable signs of slowing as a short-fall in supply seems to be the primary catalyst for the incredible recovery for the market to this point. The BRC retail sales gauge would also disappoint despite the 2.2 percent annual growth because of the weak level of sales a year ago. Attention turns to the UK external trade figures this morning. In January, the CIPS manufacturing survey reported that UK export orders rose at their highest level since this series began in January 1996, underpinned by a pick-up in world trade and the weakness of sterling. Lloyds expect the combination of a rise in exports and a fall in imports to have reduced the visible trade deficit to £6.8bn in January, from £7.3bn the month before. As with the other January data, however, Lloyds would caution that the underlying picture could be distorted by the disruptions caused by the cold weather. The markets will be watching for a fall in the trade deficit for confirmation that the hoped-for rebalancing in economic activity away from consumer spending towards net exports is resuming. Other things be equal, a reduction in the trade deficit should be positive for sterling as its implies, at the margin, less reliance on foreign capital inflows to fund the UK’s (falling) current account deficit. Focus today will also be on supply. The UK DMO is scheduled to issue £3bn of 4% 2022 gilts.

In Germany, Industrial production increased slightly (+0.6% m/m) despite bad weather conditions in January. Industrial production rose slightly in January (+0.6% m/m after -1% m/m in December 2009). The rise in production in the energy sector (+8.8% m/m after +2.2% m/m in December) only offset partially the slump in the construction sector (-14.3% m/m after -2% m/m). The rebound in the construction sector should underpin activity after the end of the winter. Nevertheless, the pace of increase in industrial production will remain low. the Sentix confidence index revealed investor confidence in current conditions and expectations improved for the current month. Also, German factory activity grew 0.6 percent in January with energy output offsetting construction.  The dominate threat of the past few weeks – the possibility of a Greek default which could in turn undermine confidence in the European Monetary Union and the euro itself – has actually faded in recent days. This morning, discussion about creating a European fund that could be used to rescue any Union member that is at risk of failure has massaged confidence. Yet, to put such an ambitious plan into action and collect the necessary capital will likely take months. A near-term crisis could inevitably render this plan impotent. 

Though the dollar would ultimately finish Monday’s session little changed, the fundamental pressures behind the market were building. Looking at the Dollar Index, the day was a washout with the session ending directly in the middle of the range that has developed over the past month. And, while there was a little more activity amongst the individual major pairings, the close would largely negate any progress made towards a trend or breakout. For the market’s most liquid cross, EURUSD made an early tag of the recently-established 1.37 ceiling on current congestion and quickly retreated to more stable footing. In a similar manner, the controlled GBPUSD bull trend over the past week would be pulled back from its daily high to position the pair once again just above 1.50. The top release is the National Federation of Independent Business’ small business optimism index for March. This indicator has received little coverage until recently; but considering small businesses account for the majority of American jobs and a considerable portion of its economic output; the indicator deserves closer review as investors speculate the nation’s pace of recovery. The official consensus is calling for a 17-month high reading of 90; but the details of the report are where the real value is derived. The outlook for sales, employment and profit are critical to the general outlook.

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