Sterling began to fall yesterday afternoon against the USD and Euro after the UK placed an extra £800 million tax on banks, in a strategy aimed to curb bonuses and free up business lending. The pound remains resilient today on the back of interest rate expectations despite the thought that markets have overestimated these over the last month. The Bank of England is due to announce its latest interest rate decision tomorrow with a very small, 18% chance of rates rising. A increase from the current level of 0.5% remains firmly forecast for May although this heavily dependent on economic data released over the next few months.
UK trade data has just been released at 9.30am this morning and came out worse than expected by showing a –9.2B gap between imports and exports against -.8.6B last month. This comes as a surprise to the market as a weaker pound should encourage further growth in exports.
The Euro was firmer against Sterling and the Dollar this morning as analysts saw GBP as vulnerable to a downside correction after recent gains against its European counterpart. German trade data also came out better than expected this morning giving the single currency a boost. German exports increased for a second month in December showing significant sales growth in Europe’s largest economy. “Exports will remain the main driver of the German economy,” said Ulrike Rondorf, an economist at Commerzbank AG in Frankfurt. “While we might see a slight slowdown, Asia and the U.S. should continue to provide some positive momentum.”
The debt crisis in the region may still be enough to curb growth but the data showed the euro zone economy was moving in the right direction. “Exports to the euro region may soften a bit,” he said. “But the overall outlook remains fairly positive as emerging markets cushion any negative impact.” said Joerg Lueschow, an economist at WestLB in Dusseldorf. Some traders believe U.K rate hike expectations may be overestimated, putting GBP at risk of a downside movement against the single currency; U.K trade data is due at 09:30GMT which may influence GBP/EUR movement today.
US DOLLAR NEWS
The Dollar slipped against the Euro this morning after positive German trade data gave the single currency a boost. The U.S currency was also on the back foot after China raised key interest rates for the third time since October, opposing expectations of monetary tightening by the Chinese Central Bank. “Investors are sceptical about China’s ability to tame their roaring economy,” said Kathy Lien, director of currency research for GFT. Whilst the moves initially helped the Dollar as trader’s appetite for risk waned, U.S equities and bonds then fell, reducing the desire for risk appetite and leading to a Dollar sell off. The greenback was largely a non-mover against Sterling this morning however, as some investors believe an expectation of a rate hike in the U.K was running its course as a prime mover for sterling strength and downside risks to the U.K currency were more likely. A rate hike for May has already been priced in to the market and if U.K trade data released at 09:30 GMT leads to more of the same speculation there may be less room for movement on the upside for Sterling to the benefit of the Dollar.
QUOTE OF THE DAY
“If you enter this world knowing you are loved and you leave this world feeling the same, everything else in between can be dealt with” – Michael Jackson