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Last week in review

Main theme driving the market.

The US dollar fell to new lows against a number of its rivals, most notably to 5-week troughs versus the euro, after the US Federal Reserve announced plans to keep interest rates close to zero for an extended period. The Fed’s decision to maintain its growth-supportive policies consequently gave risk appetite a lift. The euro enjoyed another week on the front foot as a result, aided further by a number of above-forecast economic reports from the eurozone and Germany. Cable moved to its highest level since December 21st despite official statistics confirming the UK economy shrank in the final months of 2011.

Another week of “risk-on” trading saw emerging market currencies such as the Polish zloty soar, while the Australian dollar got an additional boost from local inflation data. The yen suffered from a record fall in Japan’s international trade last year, dropping to almost 3-month lows against the Swiss franc. The franc looks set to re-test 2011 highs as trader’s sense the Swiss National Bank may be prepared to relax its intervention efforts.

Sterling (GBP):

The pound raced to 5-week highs against the under-pressure US dollar, however, its fall to 2012 lows versus the euro and Swiss franc was a more accurate reflection of its health. UK economic worries swelled after fourth quarter growth data revealed a 0.2% contraction while minutes from the Bank of England’s January 11-12 meeting were seen keeping policymakers on course to expand quantitative easing measures in the month’s ahead. In addition to growth concerns, government borrowing figures showed the total level of public debt rising above £1-trillion for the very first time, putting the nation’s fiscal shape back under the spotlight.

US Dollar (USD):

The US dollar took a broad tumble, dropping to 6-week lows against a basket of currencies following the US Federal Reserve’s decision to publish individual forecasts on where interest rates could be heading in the years ahead. In an attempt to improve transparency and ultimately drive down borrowing costs, the Fed pledged to keep rates close to zero at least until late-2014, 18-months longer than originally anticipated.

Euro (EUR):

The euro moved to 5-week highs against the US dollar and a currency basket this week after the US Federal Reserve’s pledge to keep interest rates at near-zero to support growth for longer boosted risk appetite. Furthermore, PMI measures of eurozone manufacturing and services sector activity beat market expectations while business and consumer sentiment data from Germany were very encouraging.

Japanese Yen (JPY):

The yen’s role as one of the most popular safe havens came under question after Japan published its first annual trade deficit in 31-years. The yen dropped to multi-week lows against the pound and US dollar as a result, disadvantaged further by a general pick up in risk appetite. However, worries Japan could take longer to recover from last year’s earthquake eased following data showing Japanese retail sales increasing at their fastest pace in over a year in December.

Recent key releases:

Highlights for this week

Sterling (GBP):

• If last week’s Confederation of British Industry distributive trades data is anything to go by, then the pound is set for another volatile week. CBI reported that retail sales suffered their biggest annual fall in almost three years in January, which has reinforced suspicions the UK economy is heading for another recession. Key measures of manufacturing, construction and services sector activity are due which could easily pressure the pound to new lows.

US Dollar (USD):

• The US dollar took a broad tumble, dropping to 6-week lows against a basket of currencies following the US Federal Reserve’s decision to publish individual forecasts on where interest rates could be heading in the years ahead. In an attempt to improve transparency and ultimately drive down borrowing costs, the Fed pledged to keep rates close to zero at least until late-2014, 18-months longer than originally anticipated.

Euro (EUR):

• A packed economic calendar, that includes data on eurozone retail sales, unemployment and consumer price inflation, may well be overshadowed by another round of talks between European leaders. The latest gathering on Monday will give markets an opportunity to asses the progress of the German-led fiscal plan designed to end the debt crisis. Investors will also keep a close eye on unresolved negotiations between Greece and its private creditors which still presents a massive risk for the single currency.

Japanese Yen (JPY):

• The yen’s role as one of the most popular safe havens came under question after Japan published its first annual trade deficit in 31-years. The yen dropped to multi-week lows against the pound and US dollar as a result, disadvantaged further by a general pick up in risk appetite. However, worries Japan could take longer to recover from last year’s earthquake eased following data showing Japanese retail sales increasing at their fastest pace in over a year in December.

Upcoming key releases