In this week’s Report:
• Effect of Interest Rates on Exchange rates
• EU Bailout affecting Euro
• Pound vs. Euro / Pound vs. US Dollar
• Round up of the week’s data that may affect rates
(For currencies other then GBP, EUR and USD, contact us for a consultation)
Sterling vs. Euro;
In a move that had been widely anticipated since their March meeting, The European Central Bank (ECB) announced on Thursday that the Governing Council had voted to raise the key benchmark interest rate from 1 percent to 1.25 percent. As the ECB looks to drain liquidity from the market, following unprecedented stimulus measures over the past few years in order to prop up growth following the recession, the rate hike may indeed be considered a move back towards normality.
The hike had almost totally been factored-in to the markets before the announcement and so failed to strengthen the Euro as some might have previously suspected would have happened. The hike, aimed at curbing inflation, could spell trouble for weaker economies in the Eurozone which desperately need to encourage growth. All eyes will now turn to next month's meeting. Looking into the future, Jean-Claude Trichet indicated at an ECB news conference that more euro zone rate rises were in store.
The Bank of England (BoE) contrastingly decided against raising its key interest rate, maintaining its current 0.5 percent rate. Whilst The BoE had been widely expected to hold rates for a consecutive 25th month, their decision was bolstered by the release of weak manufacturing figures earlier in the week. The majority of voting members emphasised the need for more evidence on the strength of the economic recovery before changing their stance.
Most onlookers see a diminishing chance of a rate hike in May. The policy meeting minutes are likely show another 6-3 split within the Monetary Policy Committee (MPC) - however, it is worth considering that a growing shift within the committee could stimulate a bullish reaction in the British Pound as investors wait for the central bank to steadily normalize monetary policy in the short term.
The details of the voting pattern and the debate among BoE policymakers will not be made public until the minutes are released in around two weeks' time.
In response to Portugal’s request for financial assistance, European Union Monetary Affairs Commissioner Olli Rehn said that the bailout package is likely to reach EUR 80 Billion. It is felt that the Portuguese face an uphill battle to meet its debt obligations due up in June as the government faces rising financing costs. Mounting fears that Spain will be the next country to file for a euro bailout has had implications on keeping the euro weak.
On a more positive note for the Euro, the single currency rallied to an unprecedented yearly high on Friday on the back of an improved outlook for future growth. The Euro currency may continue to strengthen over the near-term as the European Central Bank shows an increased readiness to tighten monetary policy further this year.
So in summary, Sterling-Euro rates remain low and may well do so for some time. Therefore if you have a requirement to buy Euro’s click the link below to open an account with us today.
Sterling vs. US Dollar;
At the end of last week, Sterling hit a brief 15 month high against the Greenback of 1.6430 on the back of higher than expected inflation numbers, before retreating back into the 1.63’s. This was down to investors bracing themselves for a UK interest rate hike sooner than was previously expected after the March producer prices rose faster than the forecasts showed, and was the highest reading since January 2010.
Producer prices rose by 5.4%, against expectations of a slowdown and the data will add pressure to the Bank of England to raise rates sooner than we had thought, especially when they had only a day earlier left them at an all time low of 0.5%. we are hearing that investors are now pricing in a quarter point rise in July, with a just over 50% chance we could even see a hike in May.
Sterling strength on the back of interest rate expectations wasn’t the only factor affecting Cable. The USD is under pressure on the back of a potential U.S. government shutdown. Talks aimed at avoiding a shutdown have broken up with no deal leaving only hours for negotiators to agree a budget compromise. If there is no deal, the law which funds most of the US government will expire at midnight on Friday, forcing a shutdown.
If you think that sounds bad for the US economy then you’re probably right! A shutdown means that nearly 800,000 state employees would be stopped from working and would not be paid, all government lending would cease and government sites (such as national parks) would close. The military would continue to operate without troops being paid until after a compromise was struck.
The last time we saw a shutdown was in 1995. It lasted for only 20 days, but in that short period of time we saw a full percentage point knocked off of US economic growth for just one quarter of the year! The main argument is over the length of cuts that the US government are willing to concede with the House pushing for over $60bn in cuts from now to end September 2011.
The Democrats have conceded over $33bn but will not want to go any higher as it could already be enough to seriously hinder the US economic recovery. Obama said his administration had spent the past two years trying to right the ailing US economy, and that he feared a government shutdown would derail signs of recovery seen recently.
While this all looks like it will continue to force GBP/USD up, we could still see a fall with the first reading of UK growth for 1st quarter 2011 on 27th April. If we see another negative reading (last quarter growth declined 0.5%) then the UK would be technically back in recession (look out for “Double-Dip Recession” in the ensuing media frenzy!) and it could easily outweigh any gains seen before this date.
Make sure you stay in touch with your account manager to keep abreast of developments on both sides of the Atlantic, and if you haven’t registered an account, use the link below for a free consultation with no obligation.
Weekly Economic Data that may affect exchange rates
Below we list the main data released for the week ahead. For a free consultation on how they could affect the cost of your currency requirement, open an account with us today. This is free to do, doesn’t obligate you in any way, and simply gives you access to our market knowledge and commercial exchange rates.
A quiet start to the week. House Price Data and Retail Sales are released for the UK today, both of which are a barometer of economic confidence. From Germany we have the Wholesale Price Index but it’s a fairly minor release.
Lots of UK data today so expect GBP volatility. We have Nationwide Consumer Confidence, Trade Balance figures, Retail Price index, Consumer Price Index and House Prices. For the Eurozone we have some inflation data and economic sentiment data. From the USA there are Trade Balance figures and import price data.
UK data today comprises of Unemployment data. Eurozone data is in the shape of Industrial Production. The rest of the days releases are US based; Retail Sales, mortgage approvals and Retail Sales.
Again the majority of data is US based. Jobless Claims and Inflation data are the main releases. There is a monthly report from the European Central Bank. Nothing of note from the UK.
Once again we’re quiet on the UK side. From the EU we have trade balance and a raft of inflation data. From the US there are also inflationary measures being released, in addition to Industrial Production.
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