by Adam Solomon
Sterling / Euro and US Dollar
The Pound took advantage of broad Euro weakness yesterday in the foreign exchange rate markets, rising up towards a high of 1.1400, after Moody’s Investors Service downgraded Ireland’s bonds to “junk”, highlighting the persistent concerns surrounding Euro-zone sovereign debt. The Euro also fell against the U.S Dollar for a second day, amid speculation that Greece will be unable to avoid a default on its loan repayments to creditors, even after EU officials said that debt restructuring had been discussed.
The UK currency made gains against the Euro for the fourth straight day, after Finland’s Euro-skeptic bloc is poised to enter a government with the pro-Europe National Coalition after yesterday’s election. The group believe that taxpayers shouldn’t have helped rescue Greece and Ireland earlier this year with a financial bailout.
The Pound slumped against the U.S Dollar, falling back towards 1.6250, as Ernst Young LLP’s Item Club cut its economic growth forecast for this year. The report also indicated that is no pressure for the Bank of England to raise interest rates with gross domestic product expected to expand 1.8% instead of the 2.3% forecast in January.
The focus this week will tend fall on the minutes from the Bank of England’s last policy meeting, which are due for release on Wednesday. Following the unexpected release of weaker inflation data and persistent concerns over the economic growth outlook, markets have scaled back their expectations of rate increases with futures markets no longer anticipating an increase in the May meeting.
Given the shift in sentiment, the Pound will receive a boost if the minutes undertake a more hawkish tone than expected. The voting pattern will also be watched closely to see if any more members elected to raise rates in April. The Euro-zone developments will be watched in the short-term and Sterling may consolidate on recent gains as a perceived safe haven from Euro stresses.
Speculation surrounding UK monetary policy and the potential for a rate increase will continue to influence the Pound, particularly considering the lack of economic data released this week. A move towards 1.1550 against the Euro would begin to turn the trend, while the UK currency is still likely to make further gains versus the fragile U.S Dollar.
Euro / US Dollar
The Euro exchange rate also slipped versus the Yen and Swiss Franc and the situation surrounding the elections in Finland will be monitored closely. However, the Euro will be supported from signs that the European Central Bank will continue raising interest rates this year to thwart the threat of inflation. Investors expect the central bank to lift rates by another 50 basis points this year, extending the yield advantage over the UK and the U.S, making the Euro a more attractive commodity.
The positive sentiment for the Dollar was short-lived, however, after Standard Poor’s reduced the U.S credit outlook to negative, while affirming its AAA credit rating, citing rising budget deficits and debt. The Euro remained under pressure against the majority of the 16 most actively traded currencies, as confidence in Greek debt was damaged following reports that the government had sought a debt restructuring at the previous Ecofin meeting.
There was also a relatively disappointing Spanish bond auction result, which increased unease over the risk of contagion in the Euro-zone and triggered a widening of yield spreads. In the U.S, a lackluster NAHB hosing report reinforced doubts over the U.S economy and expectations that the Fed will resist any near-term tightening in interest rates.
EU 08:58 – Markit Manufacturing PMI (Flash – April) – Markit Services PMI – Markit Composite PMI
EU 09:00 – Trade Balance (February)
U.S 13:30 – Housing Starts (March)