The currency blog

Sterling hit a level of 1.5523 in trading yesterday- this is the highest level of 2009 and marks a psychological and technical break higher from its previous range. The pound was buoyed by news in the UK banking sector in a FT report that the government was considering a sale of its shares in Lloyds and RBS thus adding overall confidence to markets. Sterling has also made gains against the euro- hitting 1.140 in trading yesterday. Alastair Darling also opined in an article in the Times that his budget forecasts will remain and that the growth will be seen at the turn of the year.

However with it was not all good news for the UK- yesterday data from the ONS confirmed that UK inflation is still falling as the CPI fell to 2.3% from 2.9% in March- this is the biggest drop since records began in 1948 and heightens the risk of deflation. The official CPI figure is still above the 2% target but deflationary forces are still strong in the UK economy and inflation is set to fall further going forward before hopefully stabilizing later in the year as the effects of QE permeate. In addition a stress test report by the IMD- a Swiss business school stated that Britain is less well placed than many of its competitors, including Germany, China, USA and the Republic of Ireland to recover following the recession. The report commented that “small nations that are export-orientated, resilient and with stable sociopolitical environments were best equipped to benefit immediately from the recovery”. Again although an interesting report and worth noting, I feel the uncertainty and the fact that we have not experienced such current economic conditions previously make the current climate difficult to evaluate.

The Bank Of England minutes just released confirmed a vote of 9-0 to leave rates unchanged and agreement in adding an extra £50 billion in the QE programme- no real surprises here and the door has also been left open for more funds to be allocated to the QE programme, especially relevant given the falling inflation data reported yesterday.

In other news we have seen EUR/USD move higher to 1.3650 and we have also seen weakness in the Yen. Data showed that Japans economy during the first quarter of 2009 contracted by 4%- the fastest pace since records began as the fall in exports continues to hit the economy. Oil continues to hold high levels at $60 per barrel.

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