Sterling suffered a disappointing end to the week after Britain’s 4th quarter economic growth was revised down from -0.5 to -0.6%, seemingly ruling out the possibility of a near term rate rise. However, the markets seem to recognise that the end of Q4 represented a highly unusual environment at the mercy of terrible weather conditions and in trading today the pound has bounced off its lows.
The market will now focus on the key UK data releases this week in the form of construction, services and manufacturing monthly PMI figures. If January’s rebound is replicated in February, a sterling/euro uptrend seems probable. However, ongoing concerns over the UK housing market and fears that the government’s austerity measures could stifle the recovery are likely to keep the pound pegged below €1.20.
Just as UK fundamentals are looking fragile, so too is the case in the eurozone. This is particularly the case given Fine Gael’s victory in the Irish general election, as the party may now look to renegotiate the Irish bailout terms. Nonetheless, ongoing interest rate speculation has focused on the ECB of late, following increasingly hawkish tones from certain policymakers. The prospect of an early ECB rate hike gained credibility today as eurozone CPI reached a 27-month high fuelled by soaring oil prices; a trend that shows no signs of relenting in the near-term.
The net result is that we do see the pound gaining steadily against the euro in the short term, although another push for €1.20 still looks some way off. Against the US dollar however, both the pound and the euro could have further near term upside.
The dollar’s fall across the board looks set to continue as US Federal Reserve Chairman Bernanke is expected this week to maintain his dovish stance on US monetary policy, largely driven by stubbornly high unemployment. Investor attention will be fixed on US Non-Farm employment figures published Friday. Regardless of the reading we still feel that any talk of a rate rise from the Fed is hugely premature but a solid figure could raise questions about whether QEII will remain in place through the end of June (as originally intended). The usual amount of hype preceding the labour market figures will probably met with a traditionally apathetic response from the market.
At this stage it seems that there’s little that will deviate the market from its current sentiment toward the US dollar. We might reassess this thinking if socio-political tensions spread to Saudi Arabia....!
Duncan Higgins
Analyst - Caxton FX
Duncan Higgins
Analyst - Caxton FX
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