Forex News And Analysis: May 1, 2012

The dollar strengthened on Monday after a rise in risk aversion led to increased dollar safe-haven buying. Negative data from the US, which showed a fall in manufacturing activity in both Chicago and Dallas weighed as well as more concerns about Spain after ratings agencies downgraded Spanish banks in line with the recent downgrade of the country.

Chicago Purchasing Mangers Index (April) fell by 6 basis points to 56.2 from 62.2 when a much smaller 2 point fall had been expected. Dallas Fed Manufacturing Activity in April fell to -3.4 when a lesser fall from 10.8 to 8.0 had been forecast. There was some positive data released on Monday and the dollar fell back paring most of its gains as it oscillated within a range.

Personal Income in March was up 0.4% - higher than the 0.3% rise expected or the 0.3% rise in the previous month. Personal Consumption Expenditure rose slightly to 0.2% compared to the 0.1% previous print. Although Personal Consumption Expenditure Deflator undershot forecasts by a basis point, Personal Spending also fell to 0.3% , which was below the fall to 0.4% expected.

EUR

The euro fell in most pairs after more bad news from Spain where official GDP data showed a -0.3% contraction in the 1st quarter of 2012 and confirmed fears the country had slipped into another recession – the second in 2-years. Despite being slightly higher than the estimated -0.4% fall the fact the economy contracted was enough to stoke market fears.

Spain's banks were also downgraded by Standard and Poor's because of their heavy exposure to the country's sovereign debt. Banks downgrade included major multi-national Banco Santander, which was downgraded from A- to A-2 and BBVA, which was lowered from A-/A-1 to BBB+/A-2. There are now quite major concerns about how Spain will cope with the austerity measures being imposed by the government as the economy continues to contract, and it is possible the country could be the next bailout candidate

Other data showed a rise in eurozone Money Supply of 2.8% compared to 2.3% from the previous 3 month period. Italian CPI remained at 3.8% and the eurozone CPI Estimate for April also remained the same at 2.6%

GBP

The pound continued its upward trend on Monday as investors used it as a safe-haven proxy for investing in Europe, given ongoing concerns about the eurozone periphery and its debt problems. Dollar weakness as a result of data showing a fall in manufacturing activity also helped sterling to rise against the greenback.

The pound continued to retain its value despite recent data showing it had fallen into a recession. The government's strong record on austerity also still supported the persistence of strength in the pound. There was no data out for the UK on Monday but Manufacturing PMI tomorrow and Construction and Services PMI later in the week could impact on the pound as they contribute to shaping growth expectations.

JPY

The yen strengthened considerably across all major pairs as risk aversion increased following the release of data showing that the vulnerable Spanish economy contracted by -0.3% in the 1st quarter and mixed data from the US where manufacturing activity stood out as a particular week spot amongst a mixed bag of figures. There was no data out for the yen but it continued to strengthen as risk appetite waned and also due to a worsening outlook for the US.

Recent dovish comments from the Federal Reserve put quantitative easing back on the table as a possible measure and this had the effect of depressing US Treasury yields. As long as they stay low, the yen will benefit as there will be a smaller advantage in owning treasuries over Japanese bonds.

Outlook for the week: A quiet week from a data perspective with the most important release as Labour Cash Earnings on Wednesday, so the main focus will be on risk appetite trends, followed by Fed commentary.