by Adam Solomon
Sterling / Euro and US Dollar
The Pound bounced back from a low of 1.6150 against the U.S Dollar in the foreign exchange rate markets yesterday and rose strongly through the Asian trading session, as global stock markets rallied, reducing the allure of the Dollar as a safe haven asset. The UK currency traded as high as 1.6350 overnight, despite reports of further explosions in the Libyan capital of Tripoli.
The latest economic data showed a large reduction in long speculative Sterling positions and the ability to resist selling pressure suggests that there is firm demand for the UK currency. The Pound will tend to gain buying support from any improvement in global risk appetite, but there will still be caution surrounding the outlook for consumer spending.
The Pound remained largely unchanged against the Euro yesterday, trading just under 1.15 for the majority of the day. The UK currency has lost 4% in value against the Euro this year and a move towards the next major area of support around 1.1270 appears likely, with the European Central Bank ready to raise interest rates in April.
The Bank of England’s chief economist Spencer Dale said yesterday that the UK economic recovery is likely to be sustained this year and investors expect global interest rates to rise faster than initial forecasts. Dale wrote in the foreword to the Bank’s quarterly bulletin that “the recovery in the UK looks set to continue. Markets expected the pace of policy tightening, both in the UK and abroad, to be faster than at the time of the previous bulletin.”
The bullish tone of the statement will provide a degree of optimism that as a collective majority, the Monetary Policy Committee will begin raising interest rates over the coming months, as the economy accelerates and inflationary pressures increase. However, the bulletin covers the quarter through February 15th and doesn’t take into account the potential impact of the earthquake and tsunami in Japan.
The focus today will inevitably fall on the latest UK inflation data and a higher-than-expected reading would increase the pressure on the Bank of England to raise interest rates. Consumer prices are expected to accelerate above 4% and to the highest level in more than two years. There will also be caution ahead of two important events on Wednesday with the March Bank of England minutes followed by the annual budget.
Euro / US Dollar
The Euro slumped towards near-term support around 1.4150 against the Dollar overnight in the foreign exchange markets and again pushed to test resistance close to 1.42, rising to the highest level in five-months. A statement from the European Central Bank chairman Jean-Claude Trichet failed to have a significant impact, while his fellow board member Yves Mersch reiterated that “strong vigilance” is required.
ECB officials have indicated that the global economic uncertainty caused by Japan’s earthquake will not deter them from raising interest rates in April in order to contain inflation that has breached target for the past three months. Money markets are now pricing in an increase in interest rates to 2.25% over the next year and expectations will continue to boost the Euro.
The structural vulnerabilities in the Euro-zone will remain an important influence on the market, as EU leaders secured an agreement on a €500 billion stability mechanism from 2013. There is still disagreement on how to increase the existing facility and there was also no agreement that the fund could buy secondary debt.
Portugal’s government faces a parliamentary vote on austerity measures tomorrow with the government threatening to resign if approval is not given. There will also be tension ahead of Friday’s EU summit, which could trigger fresh volatility. The U.S economic data was weaker-than-expected with existing home sales falling by 9.6% in February to an annual rate of 4.8 million.
U.K 09:30 – Consumer Price Index (February)
U.K 09:30 – PS Net Borrowing (February)
U.K 11:00 – CBI Industrial Orders Balance (March)
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