by Adam Solomon
Sterling / Euro and US Dollar
The Pound rallied against the U.S Dollar in the foreign exchange rate markets yesterday, 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 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 exchange rate, 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 next 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 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 when confidence in the global economic recovery deteriorates. Bank of England policy maker Andrew Sentance said this morning that a slowdown in inflation will probably be short-lived, after a report earlier this week showed that consumer prices fell to 4.0% in March.
Sentance’s term on the Monetary Policy Committee officially comes to an end on May 31st and he has voted to increase interest rates every month since June. He said that “there’s still quite a bit of evidence that there’s some further upward pressure on inflation to come.” The UK is seeing “more imported inflation than we would have if the Pound was a bit stronger and therefore that’s reinforcing the squeeze on consumer spending.”
Sentance also conceded that a rate increase would boost the Pound and that would be viewed as a “unwelcome development” in bringing inflation back towards the 2% target. He said that “we’re going to see a further upward move in inflation through the summer and there’s clearly a risk that inflation goes up to 5% or a bit above.”
Euro / US Dollar
The Euro rose towards the highest level in 15-months against the U.S Dollar, amid optimism that the sovereign debt crisis that has engulfed many of the high-deficit nations like Portugal, Ireland and Greece will be contained. The European Central Bank are also expected to increase interest rates further after a 25 basis point hike in April.
Credit rating agency Moody’s Investors Service has 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 Euro was largely unaffected by the news and continues to remain close to the highest level against the Pound since October last year. The Dollar declined against the majors yesterday, 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.
EU 10:00 – HICP (March – Final)
EU 10:00 – Trade Balance (February)
U.S 13:30 – Consumer Price Index (March – Final) – Core CPI
U.S 13:30 – Empire State Index (April)
U.S 14:00 – Net Captial Inflows – TICS (February)
U.S 14:15 – Industrial Production (March)
U.S 14:55 – Michigan Sentiment Survey (April – Prov)