by Adam Solomon
Sterling / Euro and US Dollar
Following on from last week, the Pound rallied against the U.S Dollar on Friday, rising back towards 1.6350 in early trading, as global stock markets rallied and boosted investors’ appetite for riskier assets. UK consumer confidence also rose from a record low in February and increased optimism that the Bank of England will raise interest rates over the coming months, as the recovery continues to gather momentum.
The Pound is rising and falling on interest rates speculation at present and the economic data released on a daily basis will take on added significance in the build up to the May rate announcement. By that time, the MPC will have the preliminary set of results for first quarter gross domestic product and a strong recovery from the fourth quarter contraction may give policy makers the impetus to begin tightening monetary policy.
The Pound also rallied back above 1.13 versus the Euro, albeit briefly, after the German Finance Minister Wolfgang Schaeuble said that Greece may have to restructure its debt if a June audit poses questions about the country’s ability to pay its creditors. The Euro also sank back towards 1.44 versus the U.S Dollar and recorded losses against the Yen and Swiss Franc.
The minutes from the Bank of England’s last policy-setting meeting will be watched closely this week to assess how close the MPC was to raising interest rates in April. A change in the voting pattern to indicate that another member joined the list of policy makers recommending a rate increase would have a positive impact on Sterling.
The minutes should also provide some guidance over future policy and the chances of a May increase. The retail sales data will also be under focus given the uncertainties over the outlook for consumer spending over the coming months and a strong figure would weigh into the argument for higher interest rates to counter inflation.
Trends in risk appetite will continue to have an important influence on the market and the UK currency will be more vulnerable to selling pressure if confidence in the global economic recovery deteriorates. Bank of England policy maker Andrew Sentance said last week that a slowdown in inflation will probably be short-lived, after a report earlier showed that consumer prices unexpectedly fell to 4.0% in March.
The Pound remained largely unchanged against the majors towards the close of trading on Friday, as the focus switched to events in the Euro-zone and the U.S. The UK currency made gains towards 1.1340 against the Euro for a second day, after Moody’s Investors Services downgraded Ireland’s credit rating by two levels, indicating that the sovereign debt crisis has yet to be contained.
Coupled with concerns that Greece will default on its debt has seen the Euro fall against the Dollar, Yen and Pound. The Dollar also benefited from reports that U.S consumer prices rose for a ninth straight month, led by an increase in food and fuel costs. The rise in inflation may add to pressure on the FOMC to adopt a more hawkish stance on monetary policy but an interest rate increase in the U.S is still some way off.
Euro / US Dollar
The Euro rose towards the highest level in 15-months against the U.S Dollar earlier in the week, amid speculation that the European Central Bank will increase interest rates further after a 25 basis point hike in April. However, the single currency weakened through the course of the week, after credit rating agency Moody’s Investors Service downgraded Ireland’s rating by two levels to the lowest investment grade on concerns that the government will struggle to rein in the budget deficit and restore confidence in the economy. Moody’s lowered Ireland’s rating to Baa3 from Baa1, leaving the country’s outlook on negative.
The Dollar declined against the majors on Thursday, falling to the lowest level this month versus the Yen, as U.S initial jobless claims unexpectedly rose in the latest weekly data and producer prices advanced at a slower pace. The Dollar is expected to remain under pressure, as markets continue to speculate that the Fed will be one of the last central banks to exit ultra-loose policy measures.
In terms of economic data, the focus this week will be on the U.S housing market, with existing home sales, permits and new builds due for release. In the Euro-zone, the flash manufacturing and services PMIs for April, as well as the German IFO index for the same month will have an impact on the market.
EU 15:00 – Consumer Confidence (Flash – April)
U.S 15:00 – NAHB Index (April)