After hopes for an early rate hike were raised by UK inflation levels at 4.4%, sterling has proceeded in the past four days to drop by 2% against the US dollar. Against the euro the pound has dropped by 1.6% to a five- month low. An unchanged voting pattern and dovish tones within the MPC’s minutes; a downward revision of projected UK GDP for 2011 (thank you Mr. Osborne); a threat of a UK rating cut, and some woeful retail sales figures all conspired to ensure sterling’s slide this week.
We remain optimistic that sterling’s fortunes will improve in coming months but for the next week at least the elusive catalyst to turn things around remains unseen. We might have thought that disappointing news from the EU Summit or the multitude of credit downgrades within the eurozone may have soured sentiment toward the euro. However, the resilience to the peripheral debt problems that we are seeing from sovereign buyers in the Middle and Far East makes us confident that euro strength is here to stay at least until April 7th.
This date will surely see the ECB raise interest rates, offering investors a higher yield compared to both the BoE and Fed, where rates are still a record lows. However once this date passes, this major appeal from which the euro has benefitted so much in recent weeks may well be consigned to the past, opening the door for some sterling improvements.
The best opportunity for the UK to gain a foothold next week comes on Friday, when UK manufacturing PMI figures are released. Nothing spectacular is forecast so sterling could well struggle to regain ground lost. Next week also brings US Non-Farm employment results, which as usual will have a big influence on risk appetite by clarifying the health of the world’s largest economy.
In the meantime, England fans remain grateful to Gareth Bale for pulling his hamstring.
Richard Driver
Analyst – Caxton FX
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