Pound weakens against the euro during British bank holiday

The pound weakened against the euro yesterday as some investors took advantage of the UK’s Bank holiday to push sterling lower. In a light day’s trading, speculation surrounding what the Bank of England intends to do at their next policy meeting this coming Thursday weighed on investors mind, with some suggesting there may be an extension of the central bank’s quantitative easing program to boost Britain’s ailing economy. Further contributing to investor’s concerns that the UK may not be well-placed to come out of recession was a damning report released by the European Commission, which said it expected the country’s economy to contract by 3.8% this year, a figure at odds with Chancellor Alistair Darling’s forecasts announced in the budget two weeks ago. The commission also added that, as output drops, it expected the UK’s unemployment to hit 10% by late 2010, equating to roughly 3 million Britons out of work by the end of next year. These downbeat predictions, clearly at odds with the UK government’s, put selling pressure on the pound throughout the day as investors opted to buy the euro instead, however the single currency’s gains were capped ahead of the region’s own central bank policy meeting later this week. Analysts fully expect the ECB to cut the euro zone’s interest rates by a further 25 basis points to 1% this Thursday, however question marks remain over whether it will introduce a quantitative easing program similar to that introduced by the US Fed. Last week, the Fed announced their intention to continue their quantitative easing program as planned, thus suggesting it is working and therefore putting pressure on the ECB to do the same later this week to get the euro zone out of recession. Nevertheless, the euro made ground against the pound yesterday, with potential Labour party infighting in the UK also contributing to its gains, despite several high-profile party figures pledging their support for UK Prime Minister Gordon Brown and his policies. It finished the day at 1.1197.

In early trading today, the pound has recovered all of its losses against the single currency as investors look to correct yesterday’s Bank holiday gains. There are no major announcements in the eurozone or UK today, however investors will be looking closely at both central banks to see if they give anything away ahead of their respective policy meetings on Thursday.

Pound strengthens against the US dollar in quiet trade

In a quiet day’s trading because of the Bank holiday, the pound strengthened against the dollar yesterday, although investor wariness ahead of the Bank of England’s policy meeting on Thursday capped sterling’s gains. With London closed, some European investors took advantage of thin trading to force sterling lower initially, with low liquidity causing exaggerated movements on currency markets. Most analysts expect British interest rates to remain on hold at 0.5% when the central bank meets later this week, however the market was nervous that it may decide to extend its quantitative easing program beyond the current £75 billion. Elsewhere, scepticism by the European Commission over Alistair Darling’s budget growth figures also encouraged a flight away from the perceived high-risk pound early in the session, as the commission predicted the UK’s economy would grow by just 0.1% in 2010, instead of the 1.25% the Chancellor predicted. In addition, the commission also said that they forecast the British economy to shrink by 3.8% this year, a figure also at odds with the 3.5% contraction Mr. Darling outlined in his budget a couple of weeks ago. The commission’s predictions contributed to sterling’s falls against the dollar early yesterday, as investors became nervous that the UK still has a long way to go before its recession bottoms out, therefore buying into the perceived safe-haven of the greenback.

However, the pound strengthened against the dollar yesterday afternoon as better-than-expected manufacturing data released on Friday fanned demand for currencies perceived to be higher risk. The latest Purchasing Manager’s survey showed a slowing in the pace of contraction to 42.9 points, far ahead of the 40 points predicted and the 39.5 point reading for March. The results gave investors hope that some form of stabilisation may be returning to the battered manufacturing sector, as well as the economy as a whole. However, investor concern over what the Bank of England is to decide later this week, as well as renewed questions over Gordon Brown’s leadership capped the pound’s gains against the dollar yesterday, finishing the day at $1.5014, despite a raft of leading Labour figures publicly declaring he was the man to lead Britain out of this recession.

In early trading today, the pound has continued its rise against the dollar as investor appetite for risk continued. There are no major announcements due in the US or UK today, however all eyes will be on the Bank of England ahead of their meeting on Thursday, and also on the 19 major US banks to see if there are any further developments before the results of the US government’s stress tests are announced later this week.

Euro strengthens against the US dollar on improved risk appetite

The euro strengthened against the US dollar on Friday and yesterday, as improved investor appetite for risk increased demand for the single currency. In an interrupted day’s trading because of public holidays, the single currency strengthened against the greenback as strong equity market performance in Europe and elsewhere buoyed investor mood for the perceived riskier currencies. However, the euro’s gains were capped against the greenback yesterday as investor wariness heightened ahead of the European Central Bank’s policy meeting on Thursday, as investors speculated about whether the central bank will introduce a quantitative easing program like the Bank of England and the US Fed. According to analysts, it appears almost inevitable that the ECB will cut interest rates by a further 25 basis points to 1%, however what other measures they intend to implement to get the eurozone economy out of recession remains to be seen. Speculation surrounding this issue was further fanned yesterday as the European Commission produced a very downbeat report for some of the EU’s main powerhouses’ prospects for getting out of recession. It predicted Germany’s economy would contract by 5.4% this year, Italy’s by 4.4% and Ireland’s by 9%. The euro’s gains were also capped yesterday as speculation surrounding the results of the US government’s “stress tests” on 19 of America’s major banks weighed on investor sentiment. It is predicted the tests will show the banks would need more capital in the event of severe and prolonged deterioration in the global economy, meaning further government bailouts cannot be ruled out. These results capped the euro’s gains against the dollar, although it still finished up on the day at 1.3405.

In early trading today, the euro has pared some of the gains it made against the dollar yesterday as investor cautiousness ahead of the ECB’s policy meeting resurfaced. There are no major announcements in the eurozone or US today, so all eyes will be on the central bank ahead of their meeting later this week. Investors will also be watching closely for any further developments on the US government’s stress tests on major American banks.

New Zealand dollar remains range-bound

The New Zealand dollar remained within familiar ranges yesterday, as it garnered some support from improved investor appetite and demand for higher yielding currencies over a possible better economic outlook. But further kiwi gains may be capped with the release of the RBA rate decision overnight and key local employment data released on Thursday. New Zealand's interest rate is now below Australia's and is likely to remain that way for some time following the RBA’s decision to keep rates on hold.

Aussie dollars remains range-bound after RBA keeps rates on hold

The Australian dollar remained within recent ranges against sterling yesterday, as the aussie continues to be supported by improving risk appetite and demand for higher yielding currencies. However, further gains were capped by a UK public holiday on Monday, as well as the RBA rate decision released overnight. Despite a string of relatively poor domestic economic data recently, the Reserve Bank kept rates steady at 3%.