By Jon Beddell
Foreign Currency Market Update – GBP / USD Update
The Bank of England governor Mervyn King delivered his quarterly inflation report on Wednesday. It wasn’t pretty reading. The bank slashed growth forecasts for this year and next, projecting just 2.0% for 2011 compared with the 2.8% they were expecting back in August 2010. The governor has been relying on an “export led recovery” but new data revealed that exports fell by by 4% in March. It seems that even with a persistently weak Pound (by historical standards) the export story just isn’t shaping up. Data from the purchasing managers’ indices show that manufacturing and construction slowed in April, adding further colour to the picture of a stagnating economy.
Meanwhile the US dollar is benefitting from a resurgence of the Euro zone debt problems that have sporadically harassed the single currency over the last two years. Rumours that Greece may leave the Euro were quickly quashed in Athens, but structural issues remain at the forefront of investors’ minds right now. The arrest of IMF chief Dominique Strauss Kahn may be another factor keeping the Euro on the back foot this week, although talk that this may derail the Greek bailout is probably overdone. Probably of more importance is the more dovish tone of the last ECB meeting, which resulted in no change in interest rates, and no use of the term “strong vigilance” which is generally accepted code for “we will raise rates next month”.
So the Dollar is having a good run, rising over five cents against Sterling in May, apparently shrugging off news that the US yesterday hit its $14.3 trillion debt ceiling. The fact that yields on US bonds didn’t move higher shows that investors are supremely confident that lawmakers will reach a deal to increase the limit this summer before the potential for default arises in August. Until then the US Treasury is juggling its finances (dipping in to Federal pension funds) in order to pay the country’s bills. Republicans want to see aggressive spending cuts, insisting that any increase in the debt limit must be smaller than the forecast savings.
On the data front we have monthly inflation data due for release this morning. Retail prices are expected to maintain last month’s 5.3% year on year rise, with Consumer prices rising 4.1% against 4.0% last month. Despite the BoE’s reluctance to take action in the face of the stubbornly high numbers, we expect the market to be reactive to any figures that are significantly off forecast. In the US the week’s main data event will be the release of the FOMC minutes tomorrow, and jobless data on Thursday.
The technical outlook is negative in the short term, as momentum is clearly in the Dollar’s favour. However, over a 3 month time frame the outlook remains positive as we are still within a general uptrend. It would take a break below 1.5940 to damage the longer term outlook.