Today’s session was an exciting one; with key news from both the UK economy and two major central banks. UK services data for April showed a slow in growth, even slower than forecast, in addition to the poor UK construction and manufacturing figures that came this week.
Elsewhere, the ECB and the BoE kept interest rates on hold but as expected Trichet’s press conference stole the show. Trichet failed to include the phrase “strong vigilance” with regard to eurozone inflation levels; and this has triggered a pretty massive euro sell-off. GBP/EUR has gained by a cent on the news, and EUR/USD has come off by two cents. It seems that the market was really expecting a far more hawkish approach from Trichet today. A June ECB rate rise is now off the cards, but bets on July remain realistic.
So do today’s major movements change our outlooks? Well not really, we are still negative on sterling. Sentiment towards the UK economy is at its worst in a very long time; services growth was supposed to be the ‘banker.’ When this week’s poor data is put together with the UK’s ailing consumer confidence/retail sales figures, it paints a very grim picture indeed. Some are not forecasting a BoE rate rise until 2013!
It is difficult to see how sterling can continue its rally once the dust settles on Trichet’s comments; there just isn’t a catalyst for further sterling other than a freak upsurge in UK inflation. With arch-hawk Andrew Sentance leaving the MPC this month, the doves remain firmly in control.
Contributing to the euro’s fall today has been some poor German factory orders data and a fairly sharp increase in risk aversion ahead of tomorrow’s key US unemployment data; these factors will fade from focus so a euro/dollar climb back up towards $1.50 cannot be written off. Regardless of Trichet’s comments, the factors that took the euro so high remain in place.
As ever, comments are welcomed.
Richard Driver
Senior Analyst – Caxton FX
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