by Adam Solomon
Sterling / Euro and US Dollar
The Pound declined heavily against the majors yesterday in the foreign exchange rate markets, falling back towards 1.1280 against the Euro, 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. Indeed, the Pound may trade as low as 1.07 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 rallied to a high close to 1.6370 against the U.S Dollar before the release of the minutes and subsequently retreated towards 1.63 following the data. The UK currency also lost ground against the higher-yielding currencies, slipping towards 1.53 versus the Aussie, despite an overall hawkish rhetoric on inflation.
The decision was, of course, unchanged from the March meeting with just three members voting for an increase in rate, while the other six members are still waiting for signs that the economy could incorporate a rise in borrowing costs. There was further concern over the inflation outlook with a warning that the headline rate was set to move above the 5% level.
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.
To that end, the Pound will remain vulnerable on yield grounds, especially is there is a weaker than expected retail sales report this morning. The UK currency reversed an earlier decline against the Dollar yesterday and pushed to challenge a 16-month high towards 1.65 this morning. Dollar buyers may wish to take advantage of the current rate or at least place a stop order in the market to benefit from the best rate since the fourth quarter of 2009.
Euro / US Dollar
The Euro exchange rate continued to test resistance levels against the U.S Dollar yesterday, trading close to 1.4550 during the Asian session. The Dollar was under strong selling pressure against the majority of majors and dipped towards a three year low on a trade-weighted basis. Asian central banks continued to intervene to restrain their own currencies against the Dollar and there was further speculation of diversification away from the U.S currency.
U.S existing home sales was stronger-than-expected for March with an increase in sales to 5.10 million, from a revised 4.92 million the previous month. There was, however, a renewed surge in demand for high-yield assets and the Dollar undermined by expectations that the Fed will maintain an accommodative policy with very low interest rates.
In the Euro-zone, there was some relief surrounding the latest Spanish debt auction, which helped underpin support for the Euro. The European Central Bank are also expected to raise interest rates again shortly and the Euro is likely to continue to making gains in the short-term, despite concerns over sovereign debt in the peripheral economies.
U.K 09:30 – Retail Sales (March)
U.K 09:30 – PSNCR (to end Mar)
U.S 13:30 – Weekly Jobless Claims (w/e 16th April)
U.S 15:00 – Leading Indicator Index (March)
U.S 15:00 – Philly Fed Index (April)