by Adam Solomon
Sterling / Euro and US Dollar
The Pound rose sharply against the majority of the 16 most actively traded currencies, after a report from the Chartered Institute of Purchasing and Supply showed that growth in UK service industries accelerated to the fastest pace in more than a year last month. A survey on companies rose to a 13-month high from February and the report will increase optimism that the economic recovery is gaining momentum and raise the prospect of a near-term increase in UK interest rates.
The BoE will probably refrain from raising rates this week but the increase in service sector growth shows that the economy probably bounced back from the fourth quarter slump. If the preliminary GDP data for the three months to March is ahead of expectations, the prospect of a rate increase by May/June will increase significantly and the Pound should make gains. The UK currency traded up towards 1.1440 against the Euro and above 1.62 versus the Dollar following the report.
The Pound strengthened just over 1% against the Euro by the close of trading last night to the highest level since March 24th. The UK currency has also climbed 2.7% versus the U.S Dollar since the start of the year, amid renewed optimism that the economy rebounded in the first quarter and the Bank of England are nearing the time to increase borrowing costs.
The Pound extended its gain against the Dollar this morning, after a report from the Halifax showed that UK house prices rose 0.1% in March. The UK currency is poised to record its longest stretch of gains against the Dollar in two weeks, after property prices rebounded from the 0.9% decline in February. The report adds to recent optimism that the UK housing market is recovering, which will add to speculation that the economy is growing fast enough to warrant a rate increase next month.
However, the Pound’s upward momentum was thwarted by a separate report from the British Retail Consortium, which showed that UK shop price inflation slowed for the first time in four months in March. Prices charged by retailers rose 2.4% from a year earlier, after advancing 2.7% in February. That represents the weakest gain since December just 24 hours before the Bank of England interest rate announcement.
On the month, prices fell 0.3% and that may have an impact on the latest consumer price index released later this month. UK inflation has accelerated to the fastest pace in over two years in the first quarter but any suggestions that prices may have peaked will lessen the demand for an immediate increase in rates. The increase in inflation does not stem from rising retail prices but the escalating rise in energy prices and utility bills.
Elsewhere, the Pound also lost some momentum following a report from KPMG LLP and the Recruitment and Employment Confederation, which indicated that the pace of job growth slowed last month. The government’s austerity measures will result in a massive loss of jobs in the public sector over the next four years and that will hamper growth in consumer confidence and ultimately retail sales.
The British Chambers of Commerce have recently said that the first quarter expansion in the UK economy will be weaker than predicted and vindicated the Bank of England’s decision to keep interest rates on hold. Analysts at Citigroup Inc are forecasting that the Pound will strengthen towards 1.19 against the Euro over the coming months.
The focus today will fall on the UK industrial production figures and a negative report would tend to undermine confidence in the Pound. A weaker currency has helped boost demand for UK exports, but if manufacturing output fell in the past month it would create more uncertainty about the sustainability of the economic recovery.
The Pound may also come under pressure against the majors today, amid the release of the GDP estimate for the first quarter from the National Institute of Economic and Social Research. The data will provide a little insight into the official GDP numbers later this month, but a figure beneath initial estimates would weaken the Pound.
Euro / US Dollar
The Euro rallied to close to a 14 month high against the U.S Dollar yesterday, while the single currency will remain on the front foot against the majority of the majors, ahead of the ECB interest rate announcement on Thursday. The Central Bank is widely expected to increase borrowing costs from a record low of 1% to curb inflation expectations.
Gross domestic product in the Euro-zone is expected to increase 0.3% in the final estimate for the fourth quarter. The single currency appreciated as much as 0.5% to 1.4294, the strongest level since January 20th. The Euro weakened temporarily following reports of another downgrade in Portugal’s credit rating and by a further increase in Chinese interest rates.
Nevertheless, the Euro largely shrugged off the news as interest rate expectations continue to drive the market. In the accompanying press conference tomorrow, the Chairman of the ECB Jean-Claude Trichet will reiterate a hawkish stance on inflation but there may be an element of caution given the economic growth outlook.
In the U.S, the latest ISM non-manufacturing index was slightly down on initial forecasts and suggested that growth in services may be slowing. The FOMC minutes were broadly in line with initial estimates, as a majority were content to maintain the higher-expansionary policy. Without any clear comments from the Fed Chairman Ben Bernanke, market sentiment will assume the Fed are still unwilling to tighten policy.
U.K 00:01 – BRC Shop Prices (March)
U.K 09:30 – Industrial Production (February) – Manufacturing Output
EU 10:00 – Q4 GDP (Final Estimate)
GER 11:00 – Industrial Orders (February)
U.K 15:00 – NIESR Q1 GDP Estimate