By Jon Beddell
Foreign Currency Market Update – GBP / AUD Update
The Bank of England kept rates on hold at 0.5% last week even as the European Central Bank hiked rates to 1.25%. Expectations of a UK rate hike have receded to June/July at the earliest despite stubbornly high inflation, and those expectations have been pushed out further by this week’s news that inflation did moderate a little in March with consumer prices rising 4.0% on the year compared to the 4.4% expected. The Reserve Bank of Australia also elected to keep rates steady at 4.75%, but they have already raised rates considerably from a low of 3% in late 2009.
Sterling looks highly vulnerable based on interest rates alone, offering virtually no yield, and based on recent performance a strong prospect of capital losses for those holding it! It will take solid evidence of economic improvement and higher interest rates to turn the Pound. One could argue that the Bank of England is happy enough to see a weak pound right now, as this helps the trade deficit by making exports cheaper for foreign buyers. On top of that, higher interest rates are likely to dampen domestic demand and dent tax receipts which works against the coalition’s attempts to balance the budget.
There was not much news from Australia this week aside from a strong report on new vehicle sales, and another report showing that consumers’ inflation expectations are relatively anchored at 3.5%, giving no new direction on interest rates.
The technical outlook is negative for Sterling. Having collapsed from the 1.64+ highs last month we crashed through the key 1.58 level and have since failed in an attempt to break back above there. We’ve spent the last few days consolidating close to the lows which is usually indicative of more weakness to come. The last noteworthy support level is around 1.52, the record low set in December 2010. Clients with short term AUD requirements should cover them now.