Pound Euro & US Dollar Foreign Currency Forecast – The Pound slumped against the majors yesterday


by Adam Solomon

Sterling / Euro and US Dollar

The Pound slumped against the majors yesterday, falling to a fresh six month low against the Euro, after a report from the Office of National Statistics showed that UK inflation fell to 4% in March. Consumer prices were expected to remain unchanged at 4.4%, the highest level since November 2008, and highlight the need for an increase in UK interest rates to bring inflation back towards the government’s 2% target.

The unexpected 0.4% decline in the annual rate of inflation has curbed expectations of a near-term increase and weakened the Pound against all of the 16 most actively traded currencies. A move under the 38.5% Fibonacci retracement level at 1.1270 suggests an extended move lower is likely, while the Pound also traded under 1.63 versus the U.S Dollar.

The report from the ONS also showed that the cost of food fell by the most in nearly four years last month and while inflation is still double the central bank’s target, the National Institute of Economic and Social Research has said that the recovery remains “uncertain”. Investors have scaled back expectations that the Bank of England will raise interest rates over the coming months and that will undermine confidence in the Pound.

A rate hike in August is looking more likely than May and the Pound subsequently dropped towards $1.6250 against the Dollar. According to forward contracts on the Sterling overnight interbank average, investors now expect a rate increase of 25 basis points in October and that compares to a July prediction as recently as April 8th.

The Monetary Policy Committee have collectively advocated that UK inflation has been driven higher by external factors in recent months and not by average earnings increases. The price of oil has surged 35% over the past six months, leading to an overwhelming increase in energy costs. However, core inflation, which excludes energy, alcohol, food and tobacco slowed to 3.2% last month, from 3.4% in February.

A separate report yesterday showed that the UK trade deficit narrowed to £2.44 billion in February, as exports rose 1.3% and imports fell. Recent economic data has been mixed and shows the fragile nature of the economic recovery. A report earlier this month showed that UK service sector growth expanded at the fastest pace in over a year, while manufacturing stalled and retail sales fell by a record level in March.

In addition, the Royal Institution of Chartered Surveyors said that a gauge of UK house prices actually rose for a fifth straight month in March, as the number of properties for sale declined. However, the prospect of higher interest rates over the coming months and a shortage of mortgage funding, means the recovery in the housing market may be far from secure.

Investors and analysts alike have been quick to dismiss the Pound’s prospects of recovery against the Euro. The tentative improvement in the economy during the first quarter, combined with high inflation and the prospect of interest rates remaining unchanged until the third or fourth quarter may see the UK currency trade as low as 1.10 versus the Euro over the coming weeks.

The focus this month will invariably fall on the preliminary estimate of gross domestic product in the first quarter of 2011 to see if the economy has recovered to an extent, which could incorporate an increase in borrowing costs. The Pound may come under further pressure against the majors this morning, amid the release of the latest unemployment and average earnings data.

Euro / US Dollar

The Euro slumped to lows below 1.4380 against the Dollar yesterday, as the single currency was unsettled by the deterioration in global risk appetite and an unwinding of carry trades. The fragile Dollar was, however, unable to sustain the upward swing and sank back towards to the lowest level in 15 months by the close of trading last night.

The U.S economic data showed a small decline in the trade deficit for February, but more significantly there was a decline in trade volumes, which will dampen expectations for U.S first quarter growth. Comments from Federal Reserve officials will remain under close scrutiny, amid suggestions that the FOMC will retain ultra-loose policy measures for the foreseeable future.

The Euro bounced back from reports that German investor confidence fell more than expected in April, after the European Central Bank raised interest rates this month to help curb the threat of inflation. The ZEW index of investor and analyst expectations declined to a reading of 7.6 from 14.1 in March and the severity of the drop will harm growth forecasts Europe’s largest economy in the months ahead.

Data Released

U.K 09:30 – Claimant Count (March) – ILO Unemployment Rate (3 Months to Feb) – Average Earning (3 Mths to Feb)

EU 10:00 – Industrial Production (February)

U.S 13:30 – Retail Sales -(March)

U.S 15:00 – Business Investment- (February)

U.S 19:00 – Fed Beige Book

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