by Adam Solomon
Sterling / Euro and US Dollar
The Pound rallied against the Euro exchange rate for the fourth day in a row, the longest stretch of gains in almost two months, as European officials argue over a solution to the sovereign-debt crisis. The UK currency also made modest gains against the Dollar, bouncing off the lowest level in two weeks. The ECB and the German Finance Minister Wolfgang Schaeuble are disagreeing over investors’ roles in a second Greek rescue package, prompting concern over the next IMF payment to the struggling Euro-zone nation.
The Pound also benefited from the lack of economic data released in the UK yesterday, but the renewed appetite for Sterling is unlikely to last, amid the release of unemployment, consumer spending and inflation data this week. The UK currency rose 0.3% against the Euro on the day yesterday and climbed 0.5% versus the Dollar, as the FTSE 100 Index rose just 0.1%.
However, investors last week scaled back expectations that the Bank of England will refrain from raising interest rates until May next year. As recently as February, traders were betting on a rate increase as soon as May this year, before the second quarter economic data quashed optimism that the economic recovery was gathering momentum.
Nevertheless, it is difficult to imagine that the forecast for the first UK rate increase will be pushed back much further. Strong oil prices, improving UK trade and the lack of any deficit reduction plan in the U.S means that the Pound is likely to trend higher against the Dollar through the course of the year, despite trading at a near two-week low.
The Bank of England have even conceded that UK inflation is “reasonably well anchored” despite consumer prices more than double the government’s 2% target. With growth in the economy tentitative at best, it is not inconceivable that the Monetary Policy Committee could embark on further asset purchases in a form of quantitative easing to support the recovery.
A report from the Royal Institution of Chartered Surveyors showed that UK house prices fell in May, as tighter lending conditions and concerns about the economy curbed demand. The number of real-estate agents saying that prices fell exceeded those reporting gains by 28 percentage points, the lowest reading since January.
Confidence in the housing market is clearly waning, as the government embarks on the most aggressive public spending cuts in a generation. Rising consumer prices will also restrain households’ disposable income, with mortgage approvals falling to the lowest level in four months for April. MPC member Martin Weale stated that he still wanted an early increase in UK interest rates to contain inflation, which helped support Sterling.
The focus this morning will fall on the latest round of UK consumer price inflation and the report is expected to show that prices remained unchanged at an annual rate of 4.5%. Accelerating inflation may not be enough to support the Pound because even with prices rising to the highest level in two years, a rate increase seems very far into the future.
Euro / US Dollar
The renewed negative sentiment engulfing the Euro continued yesterday, as the single currency plunged to the lowest level on record against the Swiss Franc. The Euro also found support close to 1.4310 against the Dollar, before the U.S currency came under pressure in anticipation of the retail sales report today. The overall improvement in risk appetite also curbed demand for the Dollar, as the positive tone of the Chinese data releases saw global stocks rally.
The Euro is being undermined against the majors on concern that European leaders may not be able to find a resolution to the Greek bailout. The severity of the situation was perfectly illustrated by a sharp ratings downgrade, as Standard Poor’s cut the Greet credit rating to CCC, which implies a very substantial risk of default.
The German government is still insisting that there needs to a restructuring of Greece’s private-sector debt as part of any rescue package, while the ECB remains opposed to any solution, which involves debt restructuring, as it would compromise the solvency of the central bank. The U.S data will be watched closely on Tuesday and a weaker-than-expected retail sales report would increase concern of a fresh downturn.
EU – Informal Finance Ministers’ Meeting
U.K 00:01 – RICS House Price Balance (May)
U.K 09:30 – Consumer Price Index (May) – RPI
U.K 09:30 – DCLG House Prices (April)
U.S 13:30 – Producer Price Index (May)
U.S 13:30 – Retail Sales (May)
U.S 15:00 – Business Inventories (April)