The dwindling sentiment surrounding the Pound continued yesterday as the UK currency declined against all of the 16 most actively traded currencies following the release of the minutes from the Bank of England’s last policy meeting.
The dovish tone of the report saw only seven out of the nine member committee voting to keep interest rates on hold this month with the remaining two members recommending a cut.
According to John Gieve and David Blanchflower, the worsening financial crisis and the inevitable effects on the economy warrant a further reduction in borrowing costs while the tone of the accompanying statement suggests that policy makers may be prepared to risk an upside spike in consumer price inflation.
The MPC wasn’t going to cut interest rates back-to-back in March because it would send a message to the market that policy makers were more concerned with downside risks to demand at the expense of inflation.
The CPI index showed that consumer prices accelerated in February at the fastest pace in nine months while unemployment fell to the lowest level since 1975. A strong labour market may boost consumer sentiment in the short-term and the Pound may find some much needed support this morning if retail sales exceed expectations in February.
Nevertheless, the ongoing turmoil that’s spreading across financial markets led to news that HBOS plc, the largest mortgage provider in Britain, may have liquidity problems after a number of institutions sought emergency funding from the Bank of England.
The resilience of the Euro-zone economy and the ECB’s staunchly hawkish stance on inflation saw the Euro hold firm yesterday as policy makers resist calls to intervene amid a declining financial climate and the threat of a U.S led global recession.
The Euro has appreciated 10% in value against the Dollar this year and the single currency made further gains against the majors yesterday despite a growing trade deficit and cautionary comments from a member of the ECB’s governing council.
According to Mersch, the European economy will be unable to escape a U.S economic slowdown and the growing concerns over rising credit costs may force the Central Bank into action.
The focus this morning will fall on the Manufacturing and Services PMI and the report will provide some insight as to whether the economy has been affected by the latest financial crisis.
Despite the Fed’s decision to slash interest rates by a further 75 basis points on Tuesday, the Dollar smashed through the $2.00 barrier versus the Pound yesterday and a close well underneath this level suggests that further downside movement could be likely.
Considering the instability across financial sector at present, the increased appetite for risk aversion dominates the currency market as U.S interest rates drop to 2.25% this week and the Dollar makes gains against all of the higher-yielding currencies.
Nevertheless, the overall sentiment surrounding the economy has not changed and the Dollar is likely to record further losses in the short-term as the Philly Fed manufacturing survey and an index of leading economic indicators are expected to show a sharp deterioration in the economy and in the stock market.
Data Released 20th March
U.K 09:30 PSNCR (February)
U.K 09:30 Retail Sales (February)
E.U 09:00 Flash PMI – Manufacturing (March)
U.S 13:30 Initial Jobless Claims (w/e 14th March)
U.S 14:00 Leading Indicators (February)
U.S 14:00 Philly Fed Index (March)
written by Adam Solomon
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