The US dollar has been relegated to range-bound trade overnight with no further major economic data due until next week. Mixed data this past week showed that while the US economic growth is gradually gaining momentum, the labor market continues to underperform and inflation, while gaining, is far from a cause for concern. Markets are also unsure over the direction of the US economy with Republicans and Democrats deadlocked on their plan for tackling the burgeoning deficit. However, the dollar's downside has remained relatively well supported with international markets keeping tabs on the shifting balance of power in the Middle East. Protests intensified overnight in Libya, Iran, Yemen and Bahrain leaving investors wary over the potential hindrance to oil production and tenuous regional alliances that are now in flux. However, with the relatively contained transition of power in Egypt, markets are not panicking just yet. Oil prices have been affected though, with the price of crude pushing back towards the key $90/barrel handle. As we head into the long weekend, the dollar will likely remain towards the lower end of its recent ranges on higher commodity prices and gains in equities.
The Euro erased early losses and reached a one-week high against the USD on blatantly hawkish commentary from ECB policymakers. Italian member, Lorenzo Bini Smaghi, told reporters this morning that the ECB may need to raise interest rates as global inflation pressures mount. The comments came after a report showed that German producer prices rose 1.2%, beating expectations. Bini Smaghi's stance is in clear juxtaposition to what Fed Chairman Bernanke is saying about the need for accommodative rates in the US, and has led investors to begin to price in higher interest rates in the Euro Zone sooner rather than later. However, weak demand at a recent Spanish debt auction has reminded investors that the Euro Zone's periphery economies are not out of the woods just yet.
Sterling gained this morning as UK retail sales beat even the most ambitious of forecasts. The GBP reached a two-week high against the USD after the measures surged in January by 1.9%, up from a drop of 1.4% in December, and besting the 0.5% expected. The strong results, even with new higher VAT rates, supports the BoE hawks and has investors beginning to price in higher UK interest rates. However, the pound will encounter resistance as it nears the highest levels since January 2010, and BoE Governor King has still yet to jump on board with policymaker Sentance's push for higher rates.
Commodity currencies extended their gains overnight as commodity prices moved higher across the board. As unrest spreads across the Middle East, investors have begun to price in a potential slowdown in oil production, pushing crude back towards the $90/barrel level for the first time in nearly two weeks. The aussie extended its gains above parity with the USD as improving global data encouraged investors to seek the AUD's higher yields. The CAD has also extended its gains, albeit at a slower pace than its other commodity currency counterparts, after a report showed that Canadian inflation slowed in January. While higher rates do not appear imminent in either Australia or Canada, investors expect their central banks to be proactive in countering inflationary pressures throughout 2011.
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This market summary is prepared by Union Bank's Global FX Department for the general information of its customers. It is based on the most accurate information currently available, but should not be considered investment advice or a guarantee of future exchange rates or trends.