by Adam Solomon
Sterling / Euro and US Dollar
The Pound declined against the U.S Dollar and the Euro in the foreign exchange rate markets yesterday, in the build up to the preliminary estimate of UK gross domestic product for the first quarter. The UK currency also fell against a basket of currencies, amid increased speculation that economic growth remained subdued in the first quarter, making it difficult for the Bank of England to raise interest rates, especially with inflation falling in the past month.
The Dollar declined for a sixth day against the Euro this morning, matching the longest losing streak in almost two years, amid suggestions that the ECB will raise interest rates again over the Summer, while the Fed seem unlikely to even consider tightening policy this year. In the UK, the latest industrial orders data from the Confederation of British Industry was weaker-than-expected, but there remained a general sense of optimism surrounding the outlook.
Bank of England policy maker and staunch hawk Andrew Sentance maintained his aggressive rhetoric towards raising interest rates yesterday and reiterated the need to lift borrowing costs to counter the threat of inflation. Sentance has voted for a rate increase every month since June 2010 and warned yesterday that global growth, higher oil prices and a weak Pound will keep inflation above target over the coming months.
Despite consumer prices falling to 4% in March, the MPC still expect the headline rate of inflation to breach the 5% barrier this year. Sentance will have one last opportunity to vote for a rate increase in May before leaving the panel on the 31st. The decline in UK factory orders yesterday prompted investors to scale back expectations of a near-term increase in borrowing costs and the Pound subsequently declined, while government bonds advanced. The surprise contraction in the UK economy in the fourth quarter is still seen as a blip but a weak figure this morning will prompt speculation of a slowdown and that would weaken the Pound severely.
The Pound slumped 0.6% against the Euro to test the yearly low around 1.1200 and a further move lower is likely if gross domestic product rises less than 0.5% in the first three months of the year. The UK currency also traded 0.3% lower versus the U.S Dollar yesterday, making it the worst-performing currency after the Yen and the Dollar this year.
Euro / US Dollar
The Euro found support close to 1.45 against the Dollar yesterday and pushed to a high near 1.4650, recording a fresh 16-month high, as the U.S currency remained subdued, after a small rise in consumer confidence failed to have any impact. The U.S Treasury Secretary Timothy Geithner spoke yesterday and delivered a tough stance on the Dollar.
His comments also failed to have a positive impact but there will be speculation over a more cohesive G-7 tone in curbing Dollar losses. The focus today will fall on the FOMC rate announcement this evening, especially with the Chairman Ben Bernanke holding the first quarterly press conference. The Fed are extremely unlikely to raise interest rates at this stage, but any comments about quantitative easing will be important in driving the direction of the Dollar.
In the Euro-zone, the structural vulnerabilities surrounding the peripheral economies have come to the fore once-more but the impact on the Euro has been limited. The single currency has derived strength from speculation over further interest rate increases this year, but with Greece expected to restructure its debt, the Euro may struggle to sustain this momentum.
U.K 09:30 – Gross Domestic Product (Q1)
EU 10:00 – Industrial Orders (February)
U.S 13:30 – Durable Goods (March)
U.S 19:15 – FOMC Rate Announcement Media Briefing