Daily Forex Analysis by Finexo.com 23/03/2010

Past Events

• ECB President Trichet Spoke
• GBP Bank of England Governor King Spoke

Upcoming Events

• USD Existing Home Sales (1400 GMT)
• GBP Consumer Price Index (0930 GMT)
• GBP Budget Announcement Tomorrow (1230 GMT)

Market Commentary

Yesterday saw the U.S. Dollar gain against all of its major counterparts except for the Japanese Yen as German Chancellor Angela Merkel told investors they shouldn’t expect a European Union summit due to be held in Brussels on Thursday and Friday of this week to agree on assistance for Greece.

The US Dollar gained 0.40% against the Euro overall yesterday, with the Euro closing at $1.3566. Against the Pound the US Dollar rose by 0.76% with Sterling closing at $1.5109.

The US report on existing home sales is due to be announced later today. Economists are predicting that the figure will fall for the third month in a row as unemployment remains close to 10%. Existing homes account for almost 90% of the housing market. It is believed that the extension and expansion of a federal tax credit for housing has not yet had the desired effect as the labor market remains depressed.

Across the water in Europe European Central Bank President Jean-Claude Trichet said yesterday that aid should only be given to Greece if it will include an element of stabilization for the 16-country Euro Zone as a whole. He also said it was of the upmost importance for other Euro Zone members to maintain fiscal discipline.

The the Greek Central Bank said yesterday that Greece’s economy is in a “vicious circle” and this year it will contract more severely than the government says. The Bank of Greece said economic output in 2010 will fall by 2%, worse than the government’s prediction of between 1.2% and 1.7%. The bank says the recession will be worse due to planned public spending cuts. The bank said that it approves of the government’s strategy to bring down the country’s budget deficit, but that the impact will be worse than first thought.

“The Greek economy has fallen into a vicious circle with only one way out: the drastic reduction of the deficit and debt,” the Bank’s annual monetary policy report says. The report warned that the Euro Zone’s economic recovery remains fragile, having relied to a large extent on fiscal stimulus, which must gradually be reversed as it is leading to large budget deficits.

Greece’s budget deficit last year was 12.9% of GDP, more than four times greater than the EU allows. Germany has irritated some of its European partners with its opposition to a financial aid package to help Greece overcome its debt crisis, believing that Greece can solve the problem itself.

Elsewhere in the Euro Zone, Germany’s coalition government is reportedly planning a banking levy to protect taxpayers from the costs of bank bail-outs. Leading conservative politician Volker Kauder said the money would stop banks from relying on state-funded rescues.

The levy would raise “billions of Euros” from the financial sector, he has predicted. The German government dug deep into its treasury coffers to provide a €500 billion ($679 billion) rescue package to shore up the banking system late in 2008. The new proposal seems to be designed to dissuade banks from taking risks in future which would see them begging for more government hand-outs.

The International Monetary Fund (IMF) has been asked by the G20 group of wealthiest countries to examine how banks can best contribute to the costs of insuring themselves against failure. But so far countries have adopted a piecemeal approach to the issue.

In the UK yesterday economists warned of a “sluggish” recovery in the economy this year, ahead of tomorrow’s Budget. The Confederation of British Industry said it expected the economy to grow by 1% in 2010, with the recovery remaining subdued until the middle of next year. The government forecasts growth of 1.25% this year and 3.5% for 2011. However the Chancellor, Alistair Darling, may revise those predictions in the Budget tomorrow.

After the report was released the Pound weakened further against both the US Dollar and the Euro, it closed trading down 0.36% against the Euro at EUR 0.8978.

British Consumer Price Index data is due to be released later today. Governor King from the Bank of England said yesterday that first quarter inflation was likely to be in line with the Banks forecast of 3.1%

Chancellor Alaistair Darling has reiterated there will be “no giveaways” ahead of the general election. The budget is expected to focus on encouraging private sector investment and securing long term economic growth. The government plans to halve the budget deficit – which is one of the highest in Europe and is expected to hit about 12.6% of GDP this financial year, well above the European Union threshold of 3% – over the next four years.

The Pound has had its worst annual start in the currency market in 13 years, dropping 7% against the US Dollar since January. The currency has been weakened by uncertainty regarding the outcome of the general election which Prime Minister Gordon Brown must call by June. The government was forced to borrow heavily during the recession resulting in one of the highest deficits in Europe. Mr. Darling has said that while there had been signs recently that the economy was improving, with unemployment falling and government borrowing lower than forecast there was still a lot of uncertainty.

He said “the mood of the times is not for giveaways. People are not daft, they know perfectly well we need to get borrowing down and secure (economic) recovery”.

The uncertainty about who will win the election and whether there will be a hung parliament has resulted in a bearish trend in Sterling. A minority government is looking increasingly probable according to recent UK opinion polls and sentiments are sharply divided between the Labor and Conservative parties on how to achieve the necessary spending cuts.

Elsewhere the Canadian Dollar fell for a third day, the longest losing streak since January as crude oil prices continued to fall. The loonie rose in 12 of the last 16 sessions to reach C$1.0062 last week, the closest to parity with the U.S. dollar since 2008. It has risen 3% this month for the second best performance among the 16 most traded counterparts against the US Dollar. South Africa’s Rand which also relies on commodities for export revenue preformed best.

Written by Finexo.com