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.

Pound makes gains against the euro

The pound strengthened against the euro yesterday, finishing the day at 1.1187.

• In early trading yesterday the pound strengthened against the euro as stronger-than-forecast data released in the UK fanned demand for sterling.
  
• Figures released by the British Retail Consortium showed a 6.3% month-on-month rise in value of sales in shops for April, following increases of 0.1% in February and 0.6% in March.
  
• In addition, stronger-than-expected UK manufacturing and industrial data also improved investor appetite for sterling. Month-on-Month Industrial Production registered at -0.6%, better than the -0.7% forecasted, while Month-on-Month Manufacturing Production came in at -0.1%, up from -0.9% in March. Although the latter represented the biggest quarterly fall in UK production since records began in 1948, investors took it as an encouraging sign that the pace of the UK’s recession may be easing.
  
• However, the pound’s gains were capped to some extent after President of the European Central Bank Jean-Claude Trichet’s comments at a press conference on Monday, where he said policymakers could see the first signs of an economic recovery in the eurozone. Nevertheless, sterling went into lunch well up against the single currency.
  
• However, the surprise announcement of UK unemployment data yesterday afternoon after the Office of National Statistics accidentally released them meant sterling lost some steam in late trading. The figures showed that the number of people out of work in the UK rose to 2.22 million in the first quarter of 2009, taking the total jobless rate to 7.1%. This was the worst unemployment figure since 1996. Also, benefit claimants in April rose 57,100 to 1.51 million.
  
• Nevertheless, sterling strengthened on the day against the single currency as investors, buoyed by the positive data released early in the day, remained confident an economic recovery in the UK may not be too far off.
  
• In trading so far today sterling has pared some of yesterday’s gains, as caution ahead of today’s Bank of England Quarterly Inflation Report, released at 10.30 BST, encouraged some investors to book profits. There are no major announcements due in the eurozone today.

Pound strengthens by over a cent against the US dollar

Sterling strengthened by over a cent against the US dollar yesterday, reaching a 4-month high before finishing the day at $1.5271.

• In early trading yesterday the pound strengthened against the US dollar, as better-than-expected British manufacturing data improved risk appetite in the market. Figures released by the Official of National Statistics showed manufacturing output fell by 0.1% in March, beating consensus forecasts for a 0.8% drop. Investors took this an encouraging sign that the recession was starting to ease, despite the fact it was the largest quarterly drop in UK production since records began in 1948.
  
• Sterling also rose early in the session on the back of strong UK retail sales data released by the British Retail Consortium. They reported a 6.3% rise in the value of sales in shops in April against a year earlier, further building on the 0.6% increase in March.
  
• Elsewhere, the Royal Institute of Chartered Surveyors also released surprisingly positive UK housing data, reporting that enquiries from new homebuyers rose to their highest level since 1999.
  
• More generally, investors took heart from data released in China on Monday night, which showed investment spending rose even though exports fell more steeply than expected, buoying demand for more high-yielding currencies like the pound.
  
• As a result, with risk appetite improving, sterling climbed over 1% in the morning session to hit a four-month high.
  
• In the early afternoon, stronger-than-forecast US Trade Balance data further extended sterling’s gains. Although it was down from last month’s -$25.97 billion, this month’s -$27.58 billion was far ahead of the -$28.90 billion analysts had predicted. This further improved risk sentiment in the market, with investors selling out of the perceived safe-haven of the greenback. Sterling hit a session high of $1.5350 as a result.
  
• However, sterling’s gains were capped mid-afternoon after the accidental release of British unemployment data a day early. It revealed 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. This took the total jobless rate to 7.1%.
  
• Despite this, though, sterling rose strongly on the day, finishing the day up over a cent against the greenback.
  
• Sterling has pared some of yesterday’s gains in trading so far today, ahead of some important data releases from both the UK and the US. In the former, the Bank of England’s Quarterly Inflation Report is due for release at 10.30 BST, followed by a speech by Governor Mervyn King, whilst in the latter Month-on-Month Retail Sales figures for April are out at 13.30 BST.

Euro touches 7-week high against the US dollar

The euro strengthened against the US dollar yesterday, climbing to a 7-week high before finishing the day at $1.3647.

• In early trading the euro strengthened against the greenback, after better-than-expected UK retail sales, housing market and industrial production data buoyed investor demand for riskier currencies.
  
• The single currency also rose early yesterday on the back of positive comments from the European Central Bank President made the previous day. Jean-Claude Trichet said the eurozone’s economy is at an “inflection point” and was showing tentative signs of recovery.
  li>Also boosting demand for more high-yield currencies like the euro was the news that investment spending in China had soared, even though its exports fell more sharply than expected. This further fanned risk appetite in the market, helping the euro hit a seven-week high against the dollar just before lunch.
  
• The single currency’s gains were extended following the release of much better-than-expected US Trade Balance figures early yesterday afternoon. This month’s reading of -$27.58 billion was far ahead of the -$28.90 billion analysts had forecast.
  
• As a result, the single currency finished up markedly on the day, its fourth rise in five days against the greenback.
  
• The euro has resumed its rise against the dollar this morning as improved risk sentiment in the market continues. There are no important announcements due in the eurozone today, while in the US Month-on-Month Retail Sales figures for April are due at 13.30 BST.

Kiwi dollar remains range bound

The New Zealand dollar remained largely range bound against the pound yesterday.

• The release of better-than-expected production data from the UK was offset by the early release of employment data showing the worst unemployment rate since 1996.
  
• The kiwi dollar continued to be underpinned by renewed investor risk appetite, which has helped commodities as well as high yielding currencies.
  
• The kiwi's direction is likely to continue to be directed by the ebb and flow of equity markets, which is still being used as a barometer for risk appetite.

Australian dollar holds its ground against the pound

The Australian dollar managed to hold its ground against sterling yesterday, despite the pound receiving support from stronger than expected data from the UK.

• The pound climbed back up past the A$2 level yesterday, following the release of better than expected production figures and retail sales data.
  
• However, the early release of employment figures in the afternoon dampened sterling’s gains, pushing the pound below A$2 again after the figures showed the ILO unemployment rate rose to 7.1 percent, from 6.7 percent the previous month.
  
• Reaction to the Australian Federal budget remained muted, as its economic projections and forecast deficit was within analysts’ expectations. Investors will focus on the BoE today, with the release of their inflationary report due, along with a speech by Governor Mervyn King.