Pound weakens against the euro following BoE's Quarterly Inflation Report

The pound weakened against the euro yesterday, finishing the day at 1.1142.

• In early trading yesterday the euro weakened against the pound, as strong results released by Sainsbury’s buoyed investor mood that an economic recovery in the UK would soon be underway. The supermarket chain reported underlying profits of £543 million, up 11.3% from a year earlier.
  
• However, sterling’s early rise was soon capped amid speculation about the Bank of England’s Quarterly Inflation Report out mid-morning. Its release prompted a steep fall in sterling after the bank slashed its year-on-year growth forecast to -4.5% at its lowest point, adding that the UK’s recovery would be “slow and protracted”. The BoE also said it did not expect the country’s economy to grow until the middle of 2010. This induced an immediate flight away from the pound, quickly strengthening the euro by over half a cent.
  
• Governor Mervyn King’s admission that he remains comfortable with the recent depreciation in sterling was also a blow to the pound, although he did say it provided one of the reasons to believe economic activity will rebound in the short-term.
  
• Finally, the BoE’s forecast that inflation will fall to 0.5% before rising to just above 1% in two years’ time did little to ease the pound’s plight, with most analysts agreeing that interest rates will have to remain at their current low level of 0.5% for the foreseeable future, and a further extension of the central bank’s quantitative easing program cannot be ruled out. This news further weighed on the pound, strengthening the single currency.
  
• In early trading today the pound has pared some of yesterday’s losses as investors continue to digest yesterday’s news.
  There are no major data releases due in the UK today, whilst in the eurozone, the ECB’s Monthly Report is out at 09.00 BST.

Pound weakens against the US dollar as risk appetite falls

The pound weakened against the US dollar yesterday, finishing the day at $1.5156.

• In early trading yesterday the pound continued its rise against the greenback after Sainsbury’s reported an 11.3% rise in underlying annual profits to £543 million, up from £488 million a year earlier. This news further buoyed investor confidence that an economic recovery in the UK may soon be underway, driving London equity markets slightly higher in early trading.
  
• However, sterling’s gains were capped to some extent because of the early release of the UK’s latest unemployment figures on Tuesday. It showed the number of people out of work in the UK rose by 244,000 to 2.22 million in the first three months of 2009, the biggest quarterly rise since 1981, taking the total jobless rate to 7.1%.
  
• In addition, speculation about the release of the Bank of England’s Quarterly Inflation Report mid-morning also weighed on the pound early on, as the market waited for more guidance about the bank’s quantitative easing plans going forward. Last week the central bank unexpectedly announced a £50 billion extension to its asset purchase program.
  
• When the announcement came, sterling very rapidly retreated into negative territory against the greenback, as the BoE announced it expected the UK’s economic recovery to be “slow and protracted”. It forecast a 4.5% year-on-year decline in economic growth at its lowest point and said it did not expect the economy to grow again until the middle of next year. London equity markets fell heavily as a result, weakening the pound markedly as investors looked to the perceived safety of the greenback.
  
• In addition, the BoE’s forecast that inflation will fall below the 2% target for the next three years did little to ease the pound’s plight into yesterday lunch.
  Sterling ’s losses were further extended in the afternoon after the release of worse-than-expected retail sales data in America. Sales at US retailers fell by 0.4% last month, much lower than the 0% analysts had been forecasting after the 1.2% drop in March. This bolstered demand for the safe-haven of the dollar, with the pound weakening over a cent at one point.
  
• In early trading today the pound has resumed its slide against the dollar, as investors continued to absorb the details of yesterday’s BoE report.
  There are no major announcements due in the UK today, however in the US Month-on-Month Producer Price Index figures for April are out at 13.30 BST.

US dollar strengthens as risk appetite fades

The euro weakened against the US dollar yesterday, finishing the day at $1.3599.

• In early trading yesterday the euro strengthened slightly against the greenback after it was reported in the Financial Times that America’s AAA credit rating could potentially be downgraded. However, analysts urged caution on the article because the US has run a persistent and growing budget deficit for years, highlighting the huge economic, political and financial implications in the highly unlikely event a downgrade should ever take place.
  
• News that the Bank of England had significantly downsized its growth forecasts for the UK reduced risk appetite in the market generally, with perceived “riskier” currencies like the euro suffering as a result. The BoE said it did not expect the UK’s economy to start growing until the middle of 2010, as well as forecasting a 4.5% year-on-year decline in economic growth at its lowest point.
  
• The euro’s fall was further compounded by the news that retail sales figures in the world’s largest economy were unexpectedly down last month, diming optimism that an economic recovery may soon be underway. April’s reading of -0.4% was well below the 0% change analysts had expected in US retail sales, particularly after the 1.2% fall in March.
  
• Heavy falls on global equity markets also did little to ease the euro’s plight yesterday afternoon, as investor confidence that a global economic recovery will soon be underway faded, encouraging them to look to the perceived safety of the greenback.
  
• In trading so far today the euro has resumed its slide against the dollar as investor risk appetite continues to dim.
  
• There is some important data due out today in both the US and the eurozone. In the latter, the ECB’s Monthly Report will be released at 09.00 BST, whilst in the former Month-on-Month Producer Price Index data for April is due at 13.30 BST.

New Zealand dollar gives back some ground to the pound

The New Zealand dollar gave back some of its recent gains against the aussie and sterling yesterday, as positive global economic sentiment began to wane.

• Weak economic data out of both the US and the UK saw a return of risk aversion, denting demand for high yielding currencies.
  
• The BoE’s inflation report suggested inflation may fall to 0.5 percent, while the economy may contract further over the next few months before recovering at a slower pace than expected.
  
• A Reserve Bank of New Zealand report also weighed on the New Zealand dollar, with the report saying the central bank needed to maintain its current liquidity levels due to further bad debts and losses by banks being likely.

Pound climbs back above $2 against the Australian dollar

The Australian dollar weakened against sterling yesterday, climbing above A$2 despite the release of a gloomy Bank of England forecast.

• The BoE suggested inflation may fall to 0.5 percent before rising, while the economy is expected to contract further over the next few months before recovering at a slower than expected pace.
  
• This news had the effect of dampening recent optimism that the UK economy was over the worst of its recession, while also leaving the door open for the BoE to extend its quantitative easing programme.
  
• However, the pound’s direction was largely determined by the return of risk aversion, with sterling climbing back above A$2 in the afternoon as investors sold off the riskier aussie dollar.
  
• Recent optimism over a potential recovery in the global economy had driven the high yielding aussie to 12 year highs against sterling. But weak economic data has dented this theory and will likely add further pressure on the aussie if this type of data continues.