Sterling has made another poor start to the week, seeing further falls against the Euro and US Dollar as Thursday`s poorer retail sales figures helped discourage investors from placing funds in the UK. The fragile state of the UK economy has created some nervousness surrounding tomorrow’s key economic releases including the final GDP figure for the fourth quarter of 2010, expected to show a contraction of 0.6%. Any sharper fall in this data will no doubt see further risk aversion by investors and a sell off in sterling. We are also due the current account deficit data tomorrow forecast to show a difference of –10.3B between the value we export as a nation to what we import in addition to bank lending data.
Markets are now predicting a UK rate hike in August, compared with early last week when strong inflation data brought expectations forward to July. Trichet, the ECB president has made it clear that Europe will hike rates as intended despite news events around the world. This clarity on their monetary policy stance has allowed the ECB to gain confidence in the single currency and is a major factor in sterling’s recent falls.
The Euro extended its gains over Sterling this morning after weak U.K retail sales data last week and further expectations that a Euro zone rate hike would come before one in the U.K drove the Euro to a new high of 1.1350 over the weekend. “The pound is under pressure. Weak retail figures, a somewhat dovish tone from the MPC minutes on Wednesday as well as George Osborne cutting the UK growth outlook and rate hike expectations being pushed back, are putting sterling on the backfoot,” said Geraldine Concagh, economist at AIB Treasury Group. It was not all good news for the single currency however, as Portugal’s credit rating downgrade and no clear intention from Euro zone policymakers to resolve the debt crisis put pressure on the single currency against the Dollar this morning, wiping a cent off its value on the U.S currency from Friday. The single currency remains tentative then, especially with U.S policymakers now indicating a U.S rate hike would be more forthcoming, although against Sterling the Euro remains on the front foot as investors have lost some confidence lately that the U.K will raise interest rates soon, even as inflation rises to new highs.
US DOLLAR NEWS
The Dollar was up against the Euro and Sterling this morning after Charles Plosser, President of the Philadelphia Federal Reserve Bank said the U.S central bank should raise interest rates to 2.5% (from current levels near zero) in the “not too distant future”. The remarks prompted a Dollar rally on its closest rivals, as traders priced in a rate rise to compete far more closely with one in the U.K; especially as poor retail sales and Bank of England policymaker’s rhetoric lacked conviction over the desire to raise U.K rates any time soon. Whilst a rate rise in the Euro zone seems more likely, helping to prevent the Dollar from making more substantial gains on the single currency, the greenback could find support if rhetoric from the Fed Reserve continues in a hawkish stance on interest rates. “Strong U.S. data would add credence to the Fed hawks’ view that the central bank’s super-accommodative stance needs a re-think,” said Mike Jones, a currency strategist at Bank of New Zealand Ltd. in Wellington. “Such a scenario would provide fundamental support to the dollar.” ECB President Trichet in the Euro zone and FOMC Member Evans in the U.S both speak today to provide further clues as to rate directions in their respective regions.