by Adam Solomon
Sterling / Euro and US Dollar
Following on from last week, the Pound declined against the majors, falling back towards 1.1280 against the Euro exchange rate, while the UK currency also lost ground against the majority of the 16 most actively traded currencies, after the minutes from the Bank of England’s last policy meeting showed that policy makers voted 6-3 to keep rates unchanged this month.
The accompanying statement said that recent data on the economy over the last month had “probably been to the downside” and the Pound is declining on speculation that an increase in rates is still months away. The Pound may trade lower against the Euro with the European Central Bank expected to raise rates again over the Summer, extending the yield advantage over the UK by another 25 basis points.
The minutes revealed that Andrew Sentance maintained his call for an increase of 50 basis points and he will have just one more month on the committee to push through an increase. Martin Weale and Spencer Dale also recommended a rate increase of 25 basis points, but the majority still kept the ‘wait-and-see’ policy, with markets predicting that the BoE will leave rates unchanged until the Autumn.
The Pound, however, continued to rally to against the U.S Dollar but the UK currency lost ground against the higher-yielding currencies, slipping towards 1.53 versus the Aussie, despite an overall hawkish rhetoric on inflation. The decision was unchanged from the March meeting with just three members voting for an increase in the rate, while the other six members are still waiting for signs that the economy could incorporate a rise in borrowing costs without jeopardising the economic recovery.
There was further concern over the inflation outlook with a warning that the headline rate was set to move above the 5% level and the April inflation figures, released next month, will take on added significance, particularly if consumer prices resume the upwards trend following last month’s surprise decline.
Interest rate expectations were reined in after UK consumer prices unexpectedly fell to 4% in March, but if prices resume the upward momentum in April and the first quarter growth figures are solid, then the Pound may find some support on speculation the Central Bank will lift rates a bit quicker. At present, the MPC is focused on growth projections and a lacklustre performance in consumer spending.
The Pound received a timely boost on Thursday, after a report from the Office of National Statistics showed that UK retail sales unexpectedly rose in March. Sales were up 0.2% from the previous month, despite initial forecasts of -0.5%, while the revised figure from the previous month was also increased. The report will add to optimism that the UK economy is gathering momentum, despite the budget cuts and widespread unemployment.
The focus this week will fall squarely on the first quarter GDP data released on Wednesday and a strong return to growth in the first quarter, combined with high inflation, could inspire the Bank of England to raise interest rates before the third quarter. The Pound traded up through 1.65 against the Dollar to the highest level since November 2009 on Thursday and Dollar buyers may wish to consider taking advantage of the current rate or at least place a stop order to protect against a renewed decline in Sterling.
Euro / US Dollar
The Euro traded higher against the Dollar over the Easter weekend, testing resistance in the region of 1.4625 before retreating back towards 1.4550 yesterday. U.S new home sales came in stronger-than-expected for March but failed to have a major impact on the market. The ECB President Jean-Claude Trichet said that a strong Dollar was in the interests of Fed officials and there will be increased speculation that the G-7 will look to intervene and stabilise markets.
There were also reports that IMF officials will lead a delegation to Greece within the next two weeks to discuss the problem with sovereign debt and the possibility of debt restructuring, amid suggestions that Greece will eventually default. The focus this week, in terms of economic data, will fall on the FOMC minutes and press conference from the chairman Ben Bernanke and there will be strong expectations that the Fed will leave interest rates at ultra-low levels for an extended period.
The tone and language used in the press conference and accompanying statement will be watched closely and the Dollar is likely to weaken further if the FOMC maintain the same rhetoric as previous months. Elsewhere, U.S consumer confidence for April and the advanced estimate of GDP in the first quarter will also feature.
U.K 11:00 – CBI Industrial Orders Balance (April)
U.S 14:00 – Case Shiller House Prices (February)
U.S 15:00 – Consumer Confidence (April)