US dollar strengthens as equity markets slip

The dollar strengthened against most major currencies yesterday as European and US markets retreated ahead of the first-quarter reporting season, with the Dow Jones falling 155 points. Other significant news included the announcement that IBM Corp had decided not to go ahead with the planned takeover of Sun Microsystems Inc.

Data out in the eurozone which showed that retail sales had fallen also contributed to the weakening of the euro. The data showed that sales had fallen 4% from the year before, much more than analysts had predicted. Last week the ECB cut interest rates by 0.25%, less than the anticipated 0.5% and the G20 meeting concluded with the announcement that there will be $1 trillion provided in aid to revive the global economy. This resulted in an increase in investors’ risk appetite, thus diminishing the appeal of the dollar. However, the boost in the euro against the dollar seems to have been short-lived.

Gross Domestic Product figures are due from the eurozone today, while Consumer Credit and Consumer Confidence figures will be released in the US this afternoon.

Quiet day for sterling / euro

Yesterday proved to be a quiet day for GBP / EUR trading as the Institute of Fiscal Studies warned that Chancellor Alistair Darling will have to double his fiscal tightening efforts in a bid to bring public borrowing under control. The Institute warned that an extra £39bn a year would be needed to bring recent expenditures under control, with the Budget due in just over two weeks on 22nd April. It was also revealed that new car sales were 30.5% lower last month than a year ago, as the gloom deepened further within the car industry. Any optimism lingering from the G20 meeting last week soon evaporated and the FTSE 100 ended the day 1% lower as investors became risk averse, with sterling coming under selling pressure.

The Bank of England’s interest rate decision looms on Thursday, with the Caxton FX analysts anticipating that rates will be kept on hold following a swathe of cuts in the past 6 months. The policymakers are also expected to see how the recently implemented quantitative easing programme is affecting the markets.

Today, investors will take note of industrial and manufacturing details released in the UK, with final fourth quarter GDP figures released within the eurozone this morning.

New Zealand dollar's recovery halted

The New Zealand dollar’s recent recovery halted overnight as global equity markets fell, causing growing investor risk appetite to stall. In the last week the G20’s attempt to revive the global economy had caused an upturn in equity markets, helping demand for riskier assets and high yielding currencies. Most analysts believe it is still too early to tell whether this is the start of a recovery for the kiwi. In the meantime direction will still mainly come from broader market themes.

Reserve Bank of Australia cuts rates

The Australian dollar remained within recent ranges against sterling yesterday, in a choppy day of trading which saw global equity prices fall. Little domestic data was released from either country yesterday, providing no further impetus. However, overnight the Reserve Bank of Australia cut domestic interest rates by 0.25%, and the aussie dollar strengthened following the announcement, as the central bank indicated that any further rate cuts were likely to be modest.

Sterling gains support against the euro

Sterling rose against the euro on Friday, gaining support after the release of better-than-expected services data. The market largely ignored earlier data from Halifax that showed British house prices fell 17.5 percent in the three months to March from a year ago, which was in direct contrast to a Nationwide survey on Thursday that showed UK house prices unexpectedly rose 0.9 percent in March, the first rise since October 2007.

The euro was also undermined on Friday by speculation about the European Central Bank taking non-standard measures to ease the recession, e.g. quantitative easing. ECB President Jean-Claude Trichet signalled there may be another rate cut in May as well as a decision on non-standard measures.

There are no significant economic releases due from the UK today, while the eurozone will release Retail Sales and Producer Price Index data this morning.

Pound strengthens over the US dollar amid improved sentiment

The pound strengthened over the US dollar on Friday by 1.17 cents to close the day at the 1.4840 level after investors’ confidence improved on hopes that the global economy may be stabilizing. With this confidence, there was a fall in safe haven demand for the dollar despite a barrage of negative economic data coming out of the US - 633,000 people lost their jobs in March and unemployment hit a 25-year high of 8.5%. Furthermore, average hourly earnings stayed the same in March as they were in February, whilst average weekly hours fell in March. In the UK, Halifax house price data showed that property prices fell by 1.9% in March and 17.5% in April, whilst the purchasing manager’s index services showed that conditions in the British service sector improved.

In today’s trading the pound has continued to improve, rising above 1.49 and hitting a two month high as investors remain confident. There are no major economic announcements in either the UK or the US today.

Euro strengthens against the dollar over the weekend

The euro strengthened against the dollar over the weekend following last week’s G20 meeting and the decision by the ECB to cut interest rates by 0.25% rather than the anticipated 0.5% cut. ECB President Jean-Claude Trichet stated that the central bank could lower interest rates further, possibly at their next meeting, thus allowing them more room to act, as opposed to the Bank of England and Federal Reserve who have already cut their interest rates to near zero. This announcement resulted in a renewed appetite for riskier currencies, which undermined the dollar.

Many analysts are expecting a positive week for the euro, with some predicting it could hit the $1.30 mark. However, if any grim economic data is released this week it could result in investors flocking to the safe haven of the dollar and subsequently weakening of the euro.

There are several announcements taking place in the eurozone today, including Producer Price Index and Retail Sales. There are no significant announcements taking place in the US today.

New Zealand dollar made strong gains

The New Zealand dollar made strong gains late on Friday as improved optimism over the G20 plans to revive the global economy pushed it past key technical levels. Data revealed an increased deterioration in the New Zealand government’s fiscal position in February, largely due to investment losses and lower tax revenues. However, markets largely ignored this with broader global market movements driving the currency.

Australian dollar remained off recent highs

The Australian dollar remained off recent highs against sterling over the weekend, as recent optimism from the G20 meeting was checked by more weak employment numbers from the US. This reinforced the fragile nature of the global economy and suggested that even if it is starting to recover, further bouts of poor data and volatility are still likely. However, the pound did gain some support from better than expected housing data and figures showing that the rate of contraction in the British service sector was at its slowest in 6 months. Investors will now start to focus on the interest rate decision due from the Reserve Bank of Australia tomorrow.

Choppy trading for sterling / euro

In a choppy day for sterling / euro, the pound surged above the 1.10 mark in early trading following the announcement from Nationwide that house prices rose 0.9% in March despite many expecting that they would continue to fall. While it should be stressed that it is still too early to say that the housing market has turned the corner, the news proved to be a boost for sterling. We also saw equity markets rallying in the morning, which continued throughout the day as markets responded positively to the G20 world leaders agreeing a coordinated $1.1 trillion of funds being pumped into the world’s economy. By the end of the day the FTSE 100 was up 4.3%, whilst in Paris the Cac 40 jumped 5.4% and in Frankfurt the Dax finished 6% up. The risk appetite in the market was another boost to sterling as investors picked up higher risk currencies such as the pound.

However, the pound’s gains were tempered as the European Central Bank defied many forecasts and decided to cut interest rates by 0.25%, instead of the widely anticipated 0.5%. The smaller than expected cut ensures the single currency still enjoys a significant yield advantage over sterling and the single currency did strengthen somewhat over the pound as a result. However, the pound still finished the day higher against the single currency, as the central bank’s decision was made by consensus, as a split has emerged within the governing council. It is also interesting to note that Jean-Claude Trichet did not rule out cutting interest rates further and using unconventional means to rejuvenate the economy, similar to the quantitative easing that has been seen in the UK and the US of late. The ECB has now cut rates from 4.25% since October last year as the eurozone economy has struggled through the financial crisis, but their base rate still stands higher than many other major economies. The OECD has forecast that their economy as a whole would contract by 4.1% this year, despite the ECB’s worst case scenario being a 3.2% contraction.

Both the UK and the eurozone release their PMI services data this morning, for an indication of how the service sector is performing at present.