The currency blog

It looks set to be a busy day for the Euro. We have a huge amount of Euro data due, some of which is already out including German Retail Sales & Unemployment, month on month the figures were below target, but year on year were much better and in line with expectations in that order. Also due is Italian unemployment and CPI, French Consumer spending and PPI and the Euro wide CPI and unemployment rate. Given the perceived hawkish stance of the ECB, the CPI data should be watched closely. A rate rise is much more probable in the Euro zone than the UK or US, and above target CPI will only increase the likelihood of another rise in interest rates in the next couple of months and that should begin to be reflected in the Euro rate against Sterling and the Dollar over the next couple of weeks.

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The Greenback lost some ground as risk appetite increased but markets remain lively as attitude switches between ‘risk on’ and ‘risk off’. As US Q1 GDP was left unchanged as jobless claims astonishingly increased together with continuing Greece worries suggests that a risk off mood may filter into markets despite positive US earnings. Although the USD has not particularly benefited from any rise in risk aversion lately, worries about the next IMF tranche being withheld from Greece will likely play more positively for the USD.

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We’ve just had a second look at Q1 GDP, the big Sterling figure this week. The data is in line with expectations and has no revisions with the figure staying at 0.5%. Sales on the UK high street also held steady according to the latest release from the CBI, but the retail environment remains subdued as the pincer effect from reduced consumer spending and extremely elevated price pressures continues to eat into margins. Almost on cue, MPC member Paul Fisher continued the Banks dovish outlook for the UK economy in a speech yesterday. Mr Fisher emphasised it was the downside risks to growth that had led him to keep rates on hold and even consider if further loosening may be justified. As well as the GDP figure, we have a large amount of other data out.

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The Greenback has risen by around 5% from the start of the month. The driving force is a result of higher risk aversion trading and increasing uncertainties about the Eurozone periphery have provided the currency a boost, albeit with the USD effectively being the best of a bad bunch.

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Will the Euro remain in its present form come 2012? Greece appears to be scuppering the chances of this and all the news since Friday related to its financial situation has been negative. This has run alongside negative ratings action from Fitch and S&P plus the large scale protest vote at the Spanish elections.

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Strong retail sales figures, driven by warmer weather and the royal wedding (apparently), gave Sterling a lift in early trading yesterday. But it was not enough to sustain the trend once America woke up and the Pound duly gave back any gains to finish the day broadly flat. Once the dust had settled the consensus was that April’s data is likely to be just a blip in an otherwise disappointing trend. Also yesterday the Bank of England’s chief economist, Charles Bean said the bank had accepted higher than target inflation in an aim to rebalance the economy towards exports and business investment and he suggested that to achieve their two percent target would have required a markedly higher bank rate and with it a higher level for Sterling. What he was implying is that if the Bank had raised rates, the squeeze on consumers would have been worse than is now, and shows just how tight the path the bank is currently walking actually is. No Sterling data is due today and the next important figure is UK GDP figure early next week. Read the rest of this entry »