Daily Forex Analysis by Finexo.com 21/04/2010

Past Events

• GBP CPI, out at 3.4% versus expected 3.2%, prior 3.0%
• GBP RPI ,out at 4.4% versus expected 4.1%, prior 3.7%
• EUR German ZEW Economic Sentiment, out at 53.0 versus expected 45.2, prior 44.5
• EUR ZEW Economic Sentiment, out at 46.0 versus expected 38.9, prior 37.9
• USD Fed Chairman Bernanke testified before House Financial Services Committee
• CAD Overnight Rate, out at 0.25% as expected, prior 0.25%
• AUD Monetary Policy Committee meeting minutes

Upcoming Events

• GBP Claimant Count Change (0830 GMT)
• GBP Monetary Policy Committee meeting minutes (0830 GMT)
• USD Fed Chairman Bernanke to testify before House Financial Services Committee

Market Commentary

In the UK the inflation rate rose sharply to 3.4% in March from 3% the month before according to figures released yesterday. The rise in the Consumer Prices Index (CPI) inflation rate was greater than analysts had expected. Retail Prices Index (RPI) inflation, which includes housing costs, also rose sharply to 4.4% in March, up from 3.7% the previous month.

The CPI inflation rate is the measure targeted by Bank of England interest-rate setters, while RPI is often used as a benchmark in wage negotiations.

Higher petrol prices were an important factor in rising consumer prices, the Office for National Statistics said. Petrol prices have been rising because of the relative strength of the US Dollar and higher refining costs, as well as the increasing price of oil. The price of oil hit 18-month highs at the start of April.

The continuing impact of the rise in VAT, which went back up to 17.5% in January, and the effect of flat gas bills relative to this time last year, when they fell sharply, also contributed to the spike in inflation. Despite the sharp rise in prices, analysts expect the rate of inflation to fall again in the coming months, as weak economic growth and high unemployment dampen price rises.

The governor of the Bank of England, Mervyn King, has said that he expects inflation to fall back towards the target rate of 2% in the coming months. Analysts therefore expect the Bank to keep interest rates low to stimulate growth. UK interest rates have been at the record low of 0.5% for 13 consecutive months. The policy helped to bring the UK economy out of recession in the last quarter of 2009, when it grew by 0.4%.

The Pound posted its third day of gains against the US Dollar yesterday, climbing 0.19% to close at GBP 1.53612. Against the Euro, Sterling fell for the second day, dropping 0.56% to close at GBP 0.87441.

In the Euro zone German investor confidence jumped in April as falling unemployment and a weaker Euro improved the economic outlook.

The Mannheim-based ZEW Center for European Economic Research said its index of investor and analyst expectations rose to 53 from 44.5 in March. It was the first increase in seven months. Economists had predicted a gain to 45.1.

Germany’s share index has risen 3% in the past month as economic growth, which stalled during the coldest winter in 14 years, resumed. That’s outweighing concern about Greece’s fiscal crisis, which has failed to recede even after European finance ministers and the International Monetary Fund agreed on a 45 billion Euro ($61 billion) aid package for the cash-strapped nation.

The all-European figure also rose unexpectedly – it surged from 37.9 to 46 points. A figure of 38.9 was expected. The German figure is considered more accurate, however this data contributed to yesterday’s rise by the Euro.

The single currency gained on the US Dollar for the second day, it appreciated 0.37% to close at EUR 1.34353.

In the US Federal Reserve Chairman Ben Bernanke yesterday defended the Fed’s role in the collapse of Lehman Brothers in Congressional testimony.

A recent report from a court-appointed examiner found that prior to its collapse, Lehman used an aggressive accounting device, known as Repo 105, to disguise its insolvency by temporarily moving $50 billion in bad assets off its balance sheet.

Bernanke says the Fed did not know of the practice. He said the Fed was not Lehman’s primary supervisor and said the central bank did everything it could to prevent the investment bank’s failure by providing emergency liquidity through its discount window.

The Bank of Canada yesterday signaled it may be first G7 nation to increase borrowing costs joining countries such as India and Australia, as the economy there continues to grow stoking inflation.

Yesterday’s announcement that the lending rate would remain at a record low of 0.25% contained a phrase about a “conditional commitment” to keep it unchanged until July unless the inflation outlook shifted. The bank said inflation will be “slightly higher” than its 2% target over the next year, and increased its 2010 economic growth forecast to 3.7% from 2.9%.

“With recent improvements in the economic outlook, the need for such extraordinary policy is now passing, and it is appropriate to begin to lessen the degree of monetary stimulus,” the central bank, led by Governor Mark Carney, said. “The extent and timing will depend on the outlook for economic activity and inflation.”

The Canadian Dollar jumped 1.6% against its American counterpart as the new language suggested the bank may increase rates as early as its next announcement on June 1. The Canadian Dollar closed the day trading above parity with the US Dollar at CAD 0.99792.

In Australia concern that the current mining boom will stoke inflation was a key reason the central bank raised borrowing costs toward “more normal levels” two weeks ago according to the minutes of the meeting of the Monetary Policy Committee released yesterday.

Governor Glenn Stevens has led the world in raising borrowing costs, after raising the overnight cash rate this month by a quarter percentage point to 4.25%, the fifth move in six meetings. The bank is signaling further increases in borrowing costs as the economy’s expansion accelerates, spurred by this year’s 50% jump in the spot price for iron ore.

GDP grew in the fourth quarter at the fastest pace in almost two years, rising 0.9% from the previous three months. The economy expanded 2.7% from a year earlier.

“On the question of timing, the fact that the prospective rise in the terms of trade was now likely to be noticeably stronger than had been expected was a factor suggesting that it might be prudent not to delay adjustment,” central bank officials said in the minutes. By contrast, central banks in Europe, the UK and the US have left borrowing costs close to or at record lows.

Yesterday saw the Australian Dollar drop against its American counterpart for the third day, it fell 0.64% to close at AUD 0.93116.

In the commodities market Gold prices steadied above two-week lows yesterday but investors remained cautious about potential fallout from fraud charges against Goldman Sachs and the currency volatility on Greece’s debt problems. On Monday, investors took the opportunity to cash in profits on gold, which has rallied about $100 since early February, pushing it down to a two-week low.

Written by Finexo.com