Daily Forex Analysis by Finexo.com 22/02/2010

The Fed Hikes discount rates by 0.25% to 0.75%

Past events:

• USD Core CPI m/m out at -0.1%, versus expected 0.2%, prior 0.1%
• USD CPI m/m out at 0.2%, versus expected 0.3%, prior 0.1%
• CAD Core retail sales m/m out at 0.4%, versus expected 0.4%, prior -0.2%
• GBP Core retail sales m/m out at -1.2%, versus expected -0.5%, prior 0.5%
• EUR German PPI m/m out at 0.8%, versus expected 0.4%, prior -0.1%

Upcoming events:

• EUR German Ifo Business Climate (tomorrow 0900GMT)
• GBP Inflation report hearings (tomorrow 0915GMT)
• USD Consumer Confidence (tomorrow at 1500GMT)

Market Review:

The USD soared across the board on Friday, as the dollar index reached an eight-month high of 81.342.

The greenback rallied against its most traded peers, following release of the FED’s announcement, late last Thursday night – to boost the benchmark interest rate from 0.50% to 0.75%.

The Fed’ also announced that “the typical maximum maturity for primary credit loans will be shortened to overnight from March 18. These changes are intended as a further normalization of the Federal Reserve’s lending facilities.” The Fed policy makers went on to state that “The moves do not signal any change in the outlook for the economy or for monetary policy.” However, despite the Fed’s statement, the currency markets interpreted this unexpected move as a signal that the US is ready to exit its currency Easy (lose) Monetary Policy used to combat the financial crisis.

Following the Fed’s decision of a rate hike, the US core CPI came out below expectations, and even ventured into negative territory with readings showing a fall of 0.1% from the previous month. The cost of living in the U.S. rose in January less than anticipated and a measure of prices excluding food and fuel fell for the first time since 1982, indicating the recovery is showing few signs of inflation. For the fifth straight month, the consumer-price index increased 0.2%, led by higher fuel costs. However, excluding energy and food, the core CPI unexpectedly fell 0.1 percent, reflecting a drop in new-car prices, clothing and shelter.

For the 6th week in a row, the dollar posted weekly gains against the Euro – the longest streak since a sixth week period ending during the summer of 2000. After plunging 0.788% in last Thursday’s session, its lowest price against the greenback in nine months, the Euro managed to regain some of its prior losses against the USD, increasing by 1.192% on Friday. However, despite a remarkable recovery right before the week’s end, the EUR/USD was unable to erase all of its weekly losses, and closed the week at 1.36111 – down a mere 0.0279% from last Monday’s open.

Last Friday, the EU saw the release of several key economic indicators, including the monthly German PPI, which declined slower than expected. Germany’s Producer Price Index dropped 3.4% year-on-year in January, compared the 5.2% fall in the previous month. On a monthly basis, the indicator rose 0.8% in January, compared to the previous fall of 0.1% in the preceding month, and a 0.3% expected.

A rise in output helped German manufacturing activity, expand at its fastest pace since June of 2007, indicating a healthy resumption of growth in the EU’s leading economy. A flash estimate of the Markit composite purchasing managers’ index (PMI), which surveys both the manufacturing and services sectors, rose to 55.4 from 54.6 in January, with activity expanding at its quickest pace since August 2007. The manufacturing sector PMI surpassed expectation with a reading of 57.1, a dramatic increase from January’s 53.7. While the service sector PMI came in below expectations, it still remained in positive territory, growing for a seventh consecutive month.

Following the release of these key German figures, the EU announced the Flash manufacturing PMI as well as Flash Service PMI for the entire 16-single currency bloc, reflecting similar movements as the German PMIs. While the euro zone’s manufacturing sector recorded its best month in the past two and half years (out at 54.1, versus expected 52.8 and prior 52.4), the Service sector expanded at a slower pace than expected, out at 52.0 versus expected 52.6 and prior 52.5.

Early this morning, the Euro managed to take back all of the ground lost last week to the USD, as the Asian markets appeared to prefer risk on options- the EUR/USD squeeze as high as 1.36525. Out tomorrow, is the German Ifo Business Climate – this major survey of 7,000 businesses has been steadily rising. Last month’s 95.8 score is expected to be followed by 96.3, continuing the steady uptrend seen throughout the past year.

One of the more interesting developments in the wake of the Fed decision was a rather sharp sell-off in British Pound. As the US Fed’s rate hike signals the possibility of the introduction of a tighter monetary policy, the pound continued to decline on concern that the Bank of England will be forced to continue measures to revive the British economy as other central banks begin to withdraw emergency stimuli. The GBP/USD plunged 0.85% on Friday, reaching a new yearly low of 1.53466. The pound closed the week at 1.54701, down 1.22% from the week’s open price.

The Sterling’s plight did not benefit at all from British core retail sales- sales plunged at their fastest pace for the past year and half in January as volume growth was hit by the extreme cold weather and snow seen throughout the month. While economists had predicted a fall of 0.5%, retail sales (excluding gasoline), fell 1.2% between January and December. The combination of weak British retail sales along with a strong Eurozone (and German) PMI, sent the EUR/GBP soaring 0.95%. The GBP plummeted against its European counterpart, the Euro closing at a week high of £0.87965.

Meanwhile with no British news coming out today, the BoE is set to impact markets tomorrow with its officials’ comments at the British parliament’s inflation report hearings and with the testimony of its governor, Mervyn King, at the Banking Commission hearing.

Mirroring its neighbor’s currency movement, the Canadian dollar advanced to its highest level in almost a month as crude oil, the northern nation’s biggest export commodity traded above $79 a barrel. The Loonie posted a second consecutive weekly gain as Canada’s composite leading indicator gained 0.9% in January from December, lifted by household spending and the housing sector; Retail sales rose in December, out at 0.4% as expected. Despite the Fed’s announcement of a rate hike, late last Thursday night, the Canadian Dollar still managed to gain 1.07% against its American counterpart throughout Friday’s trading session- the pair closed at 1.03907, down 1.05034 from Friday’s open. The Loonie is one of only four major currencies to gain this year against the USD rising 1.3%- if oil prices continue to soar, we could very well see the CAD go to par with the USD once again.

Written by Finexo.com