Past Events:
• USD Fed Rate Decision, out at 0.25% as expected, prior 0.25%
• USD Housing Starts, out at 0.58m versus expected 0.57m, prior 0.61m (revised)
• USD Building Permits, out at 0.61m as expected, prior 0.62m
• USD Import Prices m/m, out at -0.3% versus expected -0.1%, prior 1.3% (revised)
• EUR German ZEW Economic Sentiment, out at 44.5 versus expected 43.5, prior 45.1
• JPY Overnight Call Rate, out at expected 0.10%, prior 0.10%
Upcoming Events:
• USD Ben Bernanke to testify, (1900 GMT)
• USD PPI m/m, (1330 GMT), expected -0.2%, prior 1.4%
• GBP Claimant Count Change, (1030 GMT), expected 8.4k, prior 23.5k
• GBP MPC Meeting Minutes, (1030 GMT)
• CAD Wholesale Sales, (1330 GMT), expected 0.6%, prior 0.7%
Market Commentary
Last night the US Federal Reserve announced that it would continue to maintain the benchmark interest rate at 0.25% while giving an indication that US economic recovery was gathering momentum. The Fed said that the labor market was “stabilizing” which is a more optimistic view than was voiced at the last meeting in January when the committee said only that deterioration in the labor market was “abating”. The banks hint that the economic outlook is becoming more positive has fuelled speculation that it will move away from its promise to keep borrowing costs close to zero and that rate hikes may come in the next several months.
The Fed has held the benchmark interest rate near zero since December 2008 to shore up the US economy and help it through the most severe global recession in decades. Last March it committed to holding rates very low for “an extended period”. The US economy resumed growth in the second half of last year and grew by 5.9% in the last quarter.
The US Dollar fell against both the Euro and the Yen following the announcement. It opened the day trading at 1.3671 against the Euro before dropping to 1.3762 by the day’s close. It closed at 90.31 JYP having started the day trading at 90.41 JPY.
Two factors believed to have contributed to the Fed’s interest rate decision included housing starts data and import price data, both of which were announced earlier yesterday. Housing starts in the US fell in February as record snowfall in parts of the country hampered construction. Also fewer building permits were issued signaling that demand is slackening. Builders started construction on 575,000 new homes last month. This is a decrease of 5.9% on the previous month’s upwardly revised figure of 611,000. Increasing numbers of foreclosures are making it more difficult to clear backlogs and are discouraging new construction.
A separate report showed that the price of goods imported into the US dropped more than expected last month, indicating few signs of inflationary pressure from abroad. The import price index fell 0.3%, its first decline in seven months. The current lack of growth in the labor market that could stimulate demand in the housing sector as well as the lack of inflationary signals contributed to the Federal Reserve’s decision to maintain the benchmark interest rate at its current level. The producer price index is due to be announced later today with a drop of 0.2% expected. This figure serves as a warm up for the consumer price index which will be published tomorrow. This figure will be closely watched as any increase in consumer prices is key in terms of future rate hikes.
Later tonight Federal Reserve Chairman Ben Bernanke is due to testify, along with former Federal Reserve Chairman Paul Volcker, on a link between Fed Bank supervision and monetary policy before the House Financial Services Committee, in Washington. These speeches are always closely watched as they can contain important indicators for the future direction of interest rates.
Overnight in Japan the Central Bank announced the main policy rate. It was kept on hold at 0.10% by a unanimous vote, as widely expected. The central bank also maintained its commitment to keep monetary conditions very easy and to do its utmost to beat deflation.
Across the water in Europe, German investor confidence dropped for the sixth consecutive month in March. There are signs that the German economy, Europe’s largest, is struggling to expand and the Greek fiscal crisis is still affecting Europe’s financial markets. The ZEW Centre for European Economic Research said that its index of analyst and investor expectations slipped to 44.5 from 45.1 in February. Economists had predicted it would drop to 43.5. The data suggests that Germany’s economy which failed to grow in the last quarter of 2009 may continue to stagnate in the first quarter of this year as the coldest winter for 14 years has slowed construction and kept consumers at home. While last week data showed that German exports unexpectedly fell by 6.3% in January, ending four months of gains, the Euro’s 4.2% drop against the Dollar this year may boost foreign sales.
In the UK, claimant change data is due out later today. The claimant change data reveals the number of people claiming unemployment benefits in the previous month. It is the first indication of the employment situation as it is released a month ahead of the unemployment rate. Late last week the Bank of England said there was a risk of rising dole queues if economic recovery proved to be slower than expected. The Bank also stated that the current uncertainty in the jobs market may lead to reductions in consumer spending. Current risks to the UK labor market include weak economic recovery, job cuts through public sector belt tightening and more firms going under if lenders take a harsher stance on struggling companies. Also out later today is the Bank of England’s Monetary Policy Committee meeting minutes. This is a detailed record of the most recent meeting and gives insights into factors which affect how the Bank sets interest rates.
Sterling has had its worst annual start in 13 years and futures traders are now more bearish than ever amid concerns about the UK budget deficit. Prime Minister Gordon Brown’s government estimates the deficit will be close to 12.6% of GDP, almost as high as the 12.7% Greek deficit which prompted a bailout plan.
Yesterday Sterling opened at 1.5044 against the USD and closed trading at 1.5231. The currency slid 0.7% against the Euro yesterday to close at 0.9033, dropping from an opening price of 0.9085. The Pound is the only one of 16 most-traded currencies to weaken over the past six months against the Euro, dropping by 1.9%. In the same period it has dropped 8% against the US Dollar.
Written by Finexo.com
