FX news and analysis 30th Mar

USD

 The dollar fell on Friday after risk appetite firmed up following news from the E.U summit that a new bailout fund of between 800 – 940bn had been agreed as a precautionary 'firewall' to protect the euro-zone. Data helped support the risk-on outlook after it showed U.S Consumer Confidence rise to its highest level in 13 months boosted by optimism on the outlook for jobs. Michigan Consumer Confidence rose to 76.2 versus 74.5 expected and 74.3 previous. Core Personal Consumption Expenditure YoY (Feb), meanwhile, remained unchanged at 1.9%, and 0.1% MoM; Personal Income failed to rise as much as expected, reaching only 0.2% when 0.4% rise had been anticipated. Personal Spending rose, however, reflecting the increased confidence, up from a 0.4% increase in January to a 0.8% rise in February. Finally, Chicago PMI fell to 62.2 from 64.0 when the analyst's estimates had been for a 63.0.

EUR

 The euro rose on Friday after positive news from the E.U summit in Brussels led to a rebound in risk appetite. Overall investors were comforted by what they must have seen as a ramping up of the 'financial defence systems' preventing another financial crisis, after rumours that the EFSF and ESM will be merged to form a much larger bailout fund of at least 800bn euros. Early optimism cooled a little, however, after Luxembourg President Jean-Claude Junckers came out and said that a figure of 1 trillion was “out of the question”, nevertheless, taken together with all the other initiatives the fund is now an impressive size and much closer to that required to restore investyor confidence. As far as Spain was concerned there was an austerity vote in the Cortes on Friday and a general strike in the streets, however, markets and politicians seem to now be comfortable with the new 5.3% deficit target. On the data front, German Retail Sales remained robust, sidestepping a 16 basis point fall and remaining unchanged, and continuing to highlight the difference between the 'two Europes'. Euro-Zone CPI Estimate fell by only 1 basis point to 2.6% and French Producer Prices rose offsetting talk of the ECB expanding its balance sheet.

GBP

 The pound strengthened on Friday - unexpectedly pushing above the 1.6000 level despite recent downbeat forecasts from the OECD and a fall in data overnight. Sterling seemed to be lifted by a general rise in global risk appetite following a generally upbeat assessment of the 1st quarter of the year which had been one of the strongest for equities for over a decade. There was also a rise in confidence following the shoring up of the euro-zone bailout fund into a much more robust 800bn plus entity, which E.U officials are hoping will act as another buffer against financial contagion in the debt devastated region. Sterling made gains despite poor data which showed a fall in Consumer Confidence (Mar) to -31 when -29 had been expected which would have been unchanged from the previous month. Despite the strength of the pound it is widely believed the BOE will announce further quantitative easing in May so the recent piercing of the psychologically significant 1.60 level was something of a surprise and serious doubts remain as to whether the currency can sustain these sorts of heights as time passes.

JPY

 The yen pulled back from making stronger gains on Friday as the increased demand generated by year-end flows seemed to have dried up and risk appetite rebounded reducing the other source of demand for the currency – that of risk averse investors seeking safety. There was a substantial flow of data overnight, most of which was positive for the yen, including, Nomura Manufacturing PMI which rose to 51.1 vs 50.5; Household Spending (YoY) (Feb) which rose to 2.3% when a smaller gain from -2.3% to -0.5% had been anticipated; Jobless Rate (Feb) fell by a basis point to 4.5%; CPI (Feb) rose by 0.3% YoY versus the 0.0% expected – although it was positive given the 0.1% of the previous month and showed the BOJ was getting closer to achieving its mandate of 1% inflation. The one negative print which stood out, however, was Industrial Production (Feb) which rose by only 1.5% when a 3.7% rise had been expected although it was still higher than the -1.3% rise of the previous month.