Eurozone debt concerns fail to dent euro strength
The euro has once again managed to shake off considerable concerns surrounding debt problems in the periphery. An unprecedented Greek debt restructure now looks a matter of time, and further uncertainty over Portugal has surfaced following the success of a euro-sceptic party in a Finnish parliamentary election. Peripheral bond spreads are continuing to widen as a result, and yet the euro has hit multi-month highs against both sterling and the US dollar in recent sessions. The determination of major sovereign accounts to diversify away from the dollar despite very real debt problems never ceases to amaze.
MPC minutes disappoint but UK retail sales provide hope
Last week’s minutes revealed that the MPC is no closer to matching the ECB’s April interest rate rise in the near future. As expected, the voting pattern within the committee remains unchanged and allusions to the UK’s weak output and uncertain recovery disappointed investors. The MPC is clearly waiting for firmer evidence that the UK recovery is assured before tightening policy.
Contrary to expectations, we saw some surprising (if only slight) growth in monthly UK retail sales, an indicator that a balanced UK recovery is at least in sight. Nonetheless, a series of positive figures from the consumer/retail side will be required in the next few months if the MPC is to be convinced to pull the trigger on a rate rise.
Sterling to gain in a shortened week
There are only three working days for UK markets but there are still some key announcements to navigate this week. The UK economy will again be in focus with first quarter UK GDP announced this Wednesday. The prospect of a BoE rate rise this summer - and therefore sterling’s short term direction - hangs on a decent figure.
Last quarter saw UK output contract by half a percent; the hopes of a sustained sterling recovery depend on growth rebounding by no less than market expectations (0.6%). At present the market is pricing in a November rate rise from the BoE, which contrasts fully with consensus that the ECB will again tighten policy as soon as June. However, these BoE rate expectations could be brought forward with the help of a solid UK GDP data.
Further dollar weakness
As risk appetite seems to increase with every week that goes by, the US dollar is falling further out of favour. Sterling currently trading at a 17-month high against the greenback and the aussie has hit a fresh post-1983 high. With the dollar-funded carry trade very much on the scene, particularly within the context of the Fed’s quantitative easing programme, the US currency’s downtrend looks set to continue for weeks to come.
An update on US policy is due on Wednesday evening and the market will be looking for indications that the FED’s QEII programme will end in June as originally planned. However, we’re unlikely to hear anything just yet that alludes to higher interest rates in the US, which should keep the US dollar pinned back. Preliminary US quarterly GDP data rounds off a shortened week. Signs suggest a decent figure, but we’re not expecting this to be the catalyst for any US dollar turnaround with risk appetite on top.
For those of you taking holidays to Europe this Easter period, the GBP/EUR has come in your favour considerably today (though it remains at low levels unfortunately). Caxton FX can currently offer you €1.1120 on our prepaid currency cards if you want to avoid those withdrawl fees. Either way, have a great break!
Comments, as ever, are always welcome.
Richard Driver
Analyst – Caxton FX
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