Foreign Exchange Currency Report : German Factory Order Data and Trichet?s Comments Send EUR USD Rate Lower

May 6, 2011 - Written by John Cameron

STORY LINK Foreign Exchange Currency Report : German Factory Order Data and Trichet?s Comments Send EUR USD Rate Lower

The Pound Euro exchange rate (GBP EUR) is 1.1269. The Pound Dollar exchange rate (GBP USD) is 1.6389.

The Euro started yesterday’s session strongly, with the GBP EUR rate breaking to a new 14 month low of 1.1059 and the EUR USD rate holding at close to 1.4939, its highest level since December 2009, which it touched earlier in the week. However, the single currency’s forward move was rapidly halted when German Factory Order data for March was released at 1100hrs BST.

Analysts had predicted that the Factory Order numbers for the Eurozone’s major economy would show an increase of 0.4%, in step with the recent trend. However, there was a sense of shock in the markets when the figure showed a contraction of 4.0% on the month.

Commentators have suggested that the severe dip in the number of Factory Orders is largely attributable to the effect of the Japanese Tsunami, as Germany is a major trading partner of Japan’s. Regardless of the cause of the dip, the figure does not bode well for the future growth prospects in the Eurozone, as Factory Order data acts as a leading indicator of economic activity.

The German Factory Order numbers immediately led investors to downgrade their expectations of a near-term ECB interest rate hike, so there was little surprise when Europe’s Central Bank announced at 1245hrs BST that it was keeping rates on hold at 1.25%.

ECB President Jean Claude Trichet’s uncharacteristically dovish comments in the press conference which followed the rate announcement saw the Euro come under further selling pressure. Trichet pointedly refrained from using the phrase ‘strong vigilance’ regarding Eurozone price increases, leading analysts to suggest that a June rate hike is unlikely.

Trichet also took the unusual step of reading aloud recent statements by US Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner, which called for a ‘strong Dollar’ in order to promote stability in the global economy. With the Euro having appreciated by nearly 9% against the US Dollar since January, the most expedient way to elicit relative Dollar strength may be to actively weaken the Euro.

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