FX News and Analysis: March 13, 2012

USD

The dollar strengthened after the release of Retail Sales data just after midday, which showed a 1.1% rise in sales. This was higher than the 0.6% expected and continued to support the U.S economy's recovery narrative as well as reducing the possibility of further quantitative easing (QE). The Federal Reserve has its FOMC latter today, and expectations are that the Fed will not increase QE at their meeting because of the recent positive run of data. In his last 4 testimonies to Congress Fed Chairman Ben Bernanke has not mentioned the possibility of increasing QE and this had led some to speculate it is not on the table any more. Unemployment has fallen, which was one of the Fed's dual mandates but the housing market remains in tatters. The crisis in the euro-zone has settled - for now - with Greece almost agreed on receiving its second bailout and the 3-year LTROs amply insuring the system against shocks. According to some market commentators Institutional Investors still believe there will be another 500bn tranche of QE but if there is it probably will not be mentioned until the Fed's June meeting. In the meantime there may be more dollar strength as the Fed's doveishness declines.

EUR

The euro rose a little in the morning after the release of the German ZEW survey showed business confidence rose more than analysts' expected in March. The ZEW showed a print of 22.3 vs 10 expected and 5.4 previous. The euro-zone version of the survey also showed a higher print compared to the previous month with an 11 result vs the -8.1 previous. Bond markets were also steady as yields on Italian and Portuguese benchmark bonds fell, although the yield on the Spanish 10-yr bond rose slightly and stayed stubbornly above 5% after recent concerns about the country's budget deficit. Today it was announced that the new target for Spain' 2012 budget deficit was 5.3% of GDP - revised down from the Spaniard's own 5.8% but not as low as the 4.4% originally set. The euro fell after midday following a much stronger Retail Sales print in the U.S which was a strong indicator of an economic rebound underway. Further dollar strength was expected after the FOMC meeting which is expected to continue the less doveish trend set by Bernanke in his recent testimonies to Congress.

GBP

The pound continued to sell-off although a slightly-better-than expected data release which showed the U.K Trade Deficit shrink a little in January gave some support to sterling which traded off its 7-week lows. The data showed the Trade Deficit hit 7.58bn pounds in January compared to 7.88bn expected. The data was slightly overshadowed, however, by the FOMC in the U.S scheduled for later today. Further dollar strength is currently forecast if the accompanying commentary at the FOMC is less doveish and makes no mention of further QE. Other data showed a slight rise in house prices with DCLG House Prices in (Jan) YoY rising basis point on the previous year. Tomorrow sterling could be very much in focus as a result of unemployment data which is expected to show a small drop in Jobless Claims although no change to the actual unemployment rate which still stands at 8.4%.

JPY

 The yen weakened further on Tuesday despite a risk-off back-drop to the trading day after commentary from the BOJ's monthly rate meeting led to expectations of more QE. BOJ governor Maasaki Shirakawa swore to ease monetary policy further to help shore up the struggling economy and meet the government's 1% inflation target. Other data released overnight, supported the need for further stimulus as the Tertiary Industry Index (Jan) MoM showed a fall of -1.7% when a 0.2% rise had been expected and 1.8 in the previous month. Wholesale Prices also rose by 0.6% reflecting a rise in Crude Oil which has had even more of an impact on the economy after 52 of Japan's 54 nuclear reactors were closed following the Fukushima nuclear reactor tidal wave disaster. Tonight's data will also focus on industrial growth with the BSI Large All Industry and BSI Large Manufacturing Indexes releasing their data.