The currency blog

The Bank of England kept interest rates and the QE program unchanged yesterday, immediately after the announcement the Pound began to sell off sharply against both the Dollar and Euro and this trend continued throughout the afternoon and into early trading this morning. The key level for the GBPUSD pair will be around 1.60, with UK producer prices due out at 9.30 and US advance retail sales out this afternoon, if we see a move through the figure on the back of positive US figures then there may be room for further declines in Sterling next week. The market seems to be crying out for the MPC to jack up interest rates but expectations of future rates look unlikely to be met by the Bank in the face of impending spending cuts by the Government, and that may hurt Sterling, especially against the Euro if as expected the ECB raise rates at their next meeting. Some market watchers now think the BoE will keep rates on hold until the end of 2011.

Making it two in two weeks, Japan suffered a huge earthquake overnight with the 8.9 magnitude quake causing widespread devastation and triggered several Tsunamis with warnings of further to follow. The Yen mirrored the New Zealand Dollar in plummeting against its major trading partners but has regained some ground in early trading in London. We will have to wait for some days until the total damage can be assessed, what is clear is that Japanese authorities are not in the same position as their pacific neighbours in being able to lower interest rates temporarily to ease the pain of recovery.

This weekend sees another meeting of Euro Zone leader. Again sovereign debt issues will dominate the talks. Portugal looks increasingly like it will follow Greece and Ireland in accepting bail-outs (whether the new Irish Prime Minster will try to negotiate the bail out terms if for another time). The bond auction earlier in the week was fully covered but it came at a high cost, and we are yet to find out how many of the bonds the ECB hoovered up.

Report by Alistair Cotton

The Pound has managed to reverse its four day decline against the Dollar this morning as data showed UK shop prices rose at the fastest annual rate in two years.

The data has begun to reflect the VAT hike introduced in January and will probably rise again next month, and inflation hawks will be pointing to the continued rise in prices as justification of an interest rate rise by the Bank of England (alongside the current inflation rate being double the target….). It is unlikely that the Bank will raise rates tomorrow, so it will be a wait again to the publication of the minutes of the meeting in two weeks to ascertain whether any more than the three current members voted for a rate increase. At 9.30 today we will see figures on the UK’s trade balance in January, which is forecast to decline slightly from £9.2 Billion to around £8.5 Billion, but this figure is unlikely to sway market sentiment in the build up to the BoE decision tomorrow.

With several research pieces in the market suggesting a Eurozone rate rise is a nailed on certainty at the next meeting, the Euro looks set to remain strong against both the Dollar and Sterling moving forward, even in spite of a rating downgrade of Greek government debt (again) and its banks yesterday and what looks a costly Portuguese bond auction this morning. There have also been suggestions of large flows of Petro Dollars into Euros, continuing a general theme of diversification away from Dollars which is keeping the Euro well bid at the moment. In terms of Eurozone Data, it looks set for another quiet day with only German Industrial production set for release.

There is also an important rate decision in New Zealand tomorrow. In the aftermath of the devastating earthquake in Christchurch, the RBNZ will be weighing up whether to cut interest rates to make sure the economy does not suffer a severe decline as the rescue effort continues. The New Zealand Dollar decline steadily after news of the earthquake first hit and continues to make headway in the face of a reduction in rates.

Report by Alistair Cotton

Another week begins, and the spotlight passes from one central bank head to another yet again. In the past two weeks the markets have watched Fed Chairman Bernanke speak about interest rates and possible further quantitative easing, last week ECB President Trichet used language that indicated rate rises are just around the corner (sending the Euro markedly higher against the Pound and Dollar) and this week it is the turn of Bank of England and Mervyn King with the monthly MPC meeting scheduled this week. After last month minutes showing three members voting for a rate rise, Sterling has enjoyed a bounce against the Dollar – if not the Euro – and if the Bank does decide to raise rates we can expect further gains. However, King seemed to rule out any symbolic rate rises in the inflation report last month and given the current spike in crude oil stemming from unrest in the Middle-East, the doves on the MPC will be stressing that the UK economic recovery cannot be put in jeopardy by raising rates. King has also drawn criticism from the city with comments over the weekend that city institutions are too short-term orientated, which may or may not be true, but given that Mr King once said he thought central banking should be a dull subject, the thinking may be that he seems to be overplaying his hand and that could hurt the credibility of the bank if he is seen to be overly political.

The ECB meeting has been the catalyst for the recent Euro strength, but any rate rise in the Eurozone would probably only be beneficial for the Germans. The struggling periphery nations will certainly not welcome any move - especially the Spanish whose mortgages are prices from one year Euribor - which jumped 14 basis points immediately after Mr Trichets announcement. In the face of rises oil prices, which acts as a global tax, raising rates at the behest of the Germans risks derailing any sustainable recovery in nations trying extremely hard to get their public (and private) finance back in order.

In terms of data all the important releases are in the second half of this week. As well and the BoE meeting, we have the UK GDP estimate for Feb, expect to be negative again and from the US we have retail sales and the University of Michigan confidence survey.

Report By Alistair Cotton