Daily FX Market Outlook by AceTrader 6-4-2011

Market Review – 05/04/2011 19:47 GMT

Euro strengths in U.S. session on weaker-than-expected U.S. ISM non-manufacturing index

Euro rose strongly in U.S. session on active shorting covering on Tuesday as the lower-than-expected U.S. ISM non-manufacturing index raised concerns about the strength of the U.S. economy.

  
  
U.S. non-manufacturing ISM index in March came in much lower than expected at 57.3 versus street forecast of 59.5.   
  
Earlier, although the single currency ratcheted lower from Asian high of 1.4233 following a rise to a 5-month high of 1.4269 in previous session and price fell to an intra-day low of 1.4151 after the surprised interest rates hike by the China’s central bank in European midday, the euro then rebounded strongly in NY and the single currency hit a day’s high of 1.4246 after Fed’s minutes at March 15 meeting showed officials divided over tighter policy in 2011. Cross-buying in euro versus the Japanese yen and Swiss franc also supported the single currency, eur/jpy strengthened to a 11-month high of 120.73 while eur/chf rebounded strongly from 1.3055 to 1.3167.  
  
The China’s central bank raised interest rates for the second time this year to curb inflation, which surged to a 28-month high of 5.1% in November. According to the People’s Bank of China, benchmark one-year deposit rate will be lifted by 25 basis points to 3.25 percent, while one-year lending rate will be raised by 25 basis points to 6.31%.   
  
Minutes of the Fed’s March 15 meeting showed that some Federal Reserve officials last month believed they would have to hold to an easy monetary policy course beyond this year while a few said the central bank should move to tighter conditions before year-end. ‘Almost all’ Fed officials saw no need to taper QE2 buying.  
  
Moody’s downgraded Portugal’s bond ratings to BAA1 from A3, still under review for possible downgrade, sending Portuguese bonds yields over 10-year German bunds to a post-euro era high and close to 10%.  
  
The British pound surged against the dollar and euro as the much stronger-than-expected U.K. Services PMI fueled speculation that the Bank of England would raise interest rates in coming months. Despite falling to a day’s low of 1.6091 ahead of European opening, cable immediately jumped after the release of much stronger-than-expected UK March Services PMI, which came in at 57.1 versus forecast of 52.5. The data showed UK services grew at its fastest pace in over a year, a 13-month high, pointing towards a 0.8% expansion for the economy as a whole in the first quarter in 2011. The pound eventually climbed to an intra-day high of 1.6298 in NY midday before trading sideways. Eur/gbp tanked from 0.8819 to 0.8715.  
  
The dollar jumped against the Japanese yen to 84.49 in Tokyo morning after the inflation comments from Fed’s Chairman Ben Bernanke who indicated recent spike in inflation to be ‘transitory’, adding speculation that the Federal will hike interest rate once or twice by the year end but not a sign of the start of the tightening cycle. The pair eventually rose above Friday’s 84.73 high to as high as 84.88 after the release of Fed’s minutes.  
  
Data to be released on Wednesday include:  
  
U.K. BRC shop price index, industrial production and manufacturing production; Japan leading indicators; Swiss CPI; EU GDP; Germany factory orders; U.S. Midwest manufacturing; Canada Ivey PMI.

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