by Adam Solomon
Sterling / Euro and US Dollar
The Pound declined heavily against all of the 16 most actively traded currencies yesterday, after the minutes from the Bank of England’s last policy meeting showed that only two members voted to increase interest rates in June. The chief economist Spencer Dale and policy maker Martin Weale kept up their recommendation for an immediate 25 basis point increase to combat inflation, which has risen at the fastest pace in more than two years.
Andrew Sentance left the MPC on 31st May and his replacement Ben Broadbent seems to have adopted a more dovish stance, voting to keep rates unchanged at 0.5%. The prospect of UK rates remaining at a record low for the foreseeable future has weakened the Pound. The UK currency traded down towards 1.12 against the Euro and 1.6050 versus the Dollar.
Sterling also sank below 2.00 against the New Zealand Dollar and further losses appear likely in the short-to-medium term. The Pound may trade under 1.10 against the Euro over the coming month, with the ECB preparing to raise the benchmark lending rate in Europe on the 7th July. The Bank of England was generally quite pessimistic about the economic outlook, warning that weakness in demand was liable to last longer-than-expected.
The minutes also revealed that several members of the MPC actually considered the possibility of further quantitative easing if downside risks to medium-term growth materialised. Without doubt, the minutes have reinforced expectations that interest rates would remain at ultra-low levels this year and there were also further concerns surrounding the UK banking sector.
Escalating concerns towards the global economic outlook weakened the Pound to the lowest level in 11-weeks against the Dollar and the market seems to be plummeting to a move under the key 1.60 level. Short-sterling futures rose as investors continue to curb bets on higher interest rates with the overnight interbank average suggesting policy makers will leave rates unchanged until April 2012.
The result of the BoE minutes were largely factored into the market but the prospect of further quantitative easing and slowing growth has severely weakened Sterling sentiment. It is not inconceivable that given the recent tone of the second quarter data that the UK economy may contract in the three months to June, as the key sectors continue to slow.
The Pound also declined 1% in value against the Euro exchange rate yesterday, slipping towards 1.12 by the close of trading last night, despite the threat of a Greek default and contagion to other EU nations with high budget deficits. While UK inflation is 4.5%, Mervyn King said last week that the surge in consumer prices is temporary.
The UK currency declined against the U.S Dollar once more overnight, slipping to a fresh 12-week low, in anticipation of a report that is expected to show an index of retail sales fell for a second month in June. The report from the Confederation of British Industry is expected to show that retailers saying that sales volumes increased outnumbers those reporting declines by just 13 percentage points.
Euro / US Dollar
The Euro exchange rate found support close to 1.4350 against the U.S Dollar and again test resistance above 1.44 ahead of the FOMC meeting. There were no surprises as the Fed left interest rates unchanged at a range between zero and 0.25%. There was also a downgrading of U.S growth forecasts for 2011 to 2.7% from 3.1% previously.
The Fed expressed some concerns over price increases but it expected inflation to fall or remain below the level consistent with full employment. The FOMC also said that interest rates would remain unchanged for an extended period and suggested that further quantitative easing could still be considered in the medium term.
The Fed chairman Ben Bernanke declined to make any direct references to further quantitative easing and the main message was there was a high degree of uncertainty over the situation. The Dollar gained in support on relief that there was no direct mention of further QE. In the Euro-zone, there were further discussions surrounding the Greek debt situation and the government will hold a parliamentary vote on reform measures next week, while the EU will decide in the nest aid package on July 3rd.
EU – European Head of State Summit (2 Day)
EU 08:58 – Markit Flash PMI – Manufacturing (June) – Services – Composite
U.K 11:00 – CBI Distributive Trades Survey (June)
U.S 13:30 – Initial Jobless Claims (w/e 18th June)
U.S 15:00 – New Home Sales (May)