Weekly FX Roundup: US Dollar posts gains against majors

By Gaurav Kashyap, Alpari ME DMCC

It was another solid week for US equities, the Dow Jones Index continued its good run to close the week above 12,200 and the S&P500 closing more than 1% higher at 1,313. The real star of the week however was the AUDUSD pair which recorded a new all time high of 1.0294. With a largely void economic calendar from down under this past week, the Aussie has been the strongest to respond to renewed inflows of risk appetite as concerns surrounding Japan's nuclear crisis eased off and global equities rose.

Portugal bailout risks increase

The Euro slipped 0.76% against the Greenback this week as news from Portugal dominated the headlines. The past week saw PM Socrates step down after the Portuguese Parliament failed to pass his latest round of austerity plans, measures the PM argued were necessary to avoid a bailout.

Market perceptions for a bailout are ever increasing following Socrates' exit and the lack of unity in the Parliament in tackling a ballooning deficit through a combination of additional spending cuts and aggressive tax hikes. Further eroding the situation in the small Iberian peninsula nation were the double downgrades by rating agencies Fitch and S&P who cut Portugal's debt rating from A+ to A- and A- to BBB respectively.

Euro US Dollar pairing down on Spain, Ireland data

Elsewhere in the Eurozone, Moody's downgrades of 30 Spanish banks and Ireland's latest data showing their economy fell by 1% last year saw EURUSD close the week 109 points lower at 1.4087. The downward momentum in the pair wasn't as reflective as all the negative press emanating from the EU this past week as market participants remain bullish of the prospects of a rate hike from the ECB in the near future.

Looking to the trading week ahead however, much could trigger a larger reversal especially with the European Banking Authority conducting its latest stress test on Irish banks. Initial estimates show that Irish banks may require up to €35bn following the tests which are to be conducted on March 31.

Sterling pricing dictated by rate hike expectation

Pricing action in the Sterling this past week was once again dictated by rate hike expectations. Tuesday's inflation data showed YoY CPI increased to 4.4% (v 4.2% exp / 4.0% prev) while MoM CPI increased to 0.7% (v 0.6% exp / 0.1% prev). The elevated inflationary readings gave support to the argument of a rate hike on behalf of the BoE sooner rather than later and boosted the GBPUSD to a more than one year high of 1.6401.

The upside momentum was capped at these levels as Wednesday's meeting minutes from the BoE's meeting on March 8 & 9 showed a similar picture to the previous month's meeting; rates were held at 0.50% and the asset purchase plan was unchanged at £200bn. There were no additional hawkish overtures and like February's meeting, the same three central bankers voted for an increase in the rates; Andrew Sentence voted for an increase by 50 basis points while Spencer Dale and Martin Weale preferred to increase the rate by 25 basis points.

The rhetoric from the meeting minutes remained largely the same with the Committee concluding that medium term inflation was likely to fall back and the near term inflationary pressures are resulting from higher commodity prices and increased VAT. With interest rate hike expectations at the fore mind of most GBP traders, the meeting minutes did little to infuse confidence and as a result GBPUSD sold off following the release. Compounding to the downside in the pair was Thursday's weaker than expected retail sales which showed a drop to -1.0% MoM and 1.2% YoY. The combo of weaker news and unchanged tone of the minutes saw the GBPUSD close the week more than -1.1% lower at 1.6042.

Looking at the trading week ahead, all focus will be on the week-ending Jobs report from the US. A second consecutive stronger reading from the US labor market will surely have market participants expecting more hawkish overtones from the Federal Reserve which in turn should be supportive of the US Dollar. On the flipside, a much better report from February will no doubt lead to increased expectations with regards to March's report and a disappointing reading could have the adverse affect on the Greenback.