Sterling weakened yesterday versus the euro and a number of primary trading pairs fundamentally as a result of the Bank of England minutes which showed no change in the voting of 6-3 in favour of keeping interest rates on hold. Analysts now believe that a rate hike will not take place in the UK until quarter 3 or 4. Comments from the Monetary Policy Committee have implied that any move upwards with interest rates could dampen demand and be generally harmful to the UK economic recovery.
GBP/USD has broken 1.65 this morning which is a 15 month high – this could be temporary ahead if UK retail spending is negative this morning at 0930, which is expected to show a 0.5% drop in sales on the month. An improvement on this forecast may give Sterling a much needed.
The timing of a potential interest rate increase from the Bank of England will depend on the return to growth in the first quarter and the next consumer price index for April. The Pound is still under continued pressure due to the UK banking sector developments.
Although UK inflation has subsided in the latest monthly figures, consumer prices are still double the 2% target and all eyes will be fixed on the first quarter GDP data released next Wednesday. A positive return to growth after the fourth quarter contraction would prompt renewed speculation over an earlier than expected rate increase and that would have a positive impact on the Pound.
The Pound fell further against the Euro yesterday, despite concern that Greece will struggle to contain sovereign debt and default on its repayments to creditors. This is due to general consensus amongst traders that the European Central Bank are still likely to continue raising interest rates this year and at a faster pace that the Bank of England and Fed.
The Euro is expected to remain strong against the majors and find decent support from interest rate differentials over the coming months, despite the ongoing concern over sovereign debt issues in the peripheral Euro-zone countries with high budget deficits. The Sterling Euro pair closed around 1.1300 yesterday and it seems the 1.1250 support is holding firm, a positive move upwards could signify a key reversal in trend.
EUR/USD soared yesterday and continues this morning finding strong support earlier in the week at 1.4220 rallying strongly through the course of the day, following a further revival in risk appetite, which reduced the appeal of the Dollar as a safe haven.
There is talk of the EUR/USD pair reaching 1.50 as the Euro continues to gain on higher yield expectations. Bond auctions in the Euro zone went well yesterday and as a result the Euro has paired back losses from the start of the week. The Euro is also benefiting from the current ‘risk on’ environment and the hawkish outlook from the ECB.