Sterling flat as investors await Thursday interest rate decision

Tom Tong05/Apr/2011Currency Updates

GBP

Sterling was fairly flat against the euro and the dollar yesterday ahead of the key interest rate decision on Thursday. Traders seemed unwilling to reposition themselves until the key data of the week had been released. Despite this, sterling was buoyed by the news that UK construction PMI data had printed 0.2% above expectations, meaning that market conditions in the sector were on the up. The news that Vodafone had sold its stake in the French mobile phone company SFR to Vivendi for a significant profit also bolstered the pound. Today will see further UK PMI figures, this time from the service sector, being released with further surprises to the upside giving the pound support ahead of Thursday’s key meeting. Analysts are expecting no change in policy from the MPC decision on Thursday.

USD

The dollar was marginally up against a basket of currencies yesterday as the dollar index rose by 0.02%, but the greenback remained near a five month low against the euro ahead of the interest rate decision in Brussels on Thursday. The dollar was subject to the diverging rhetoric of several Fed speakers yesterday. Early in the morning session traders reacted positively to Bernanke’s speech, in which he reassured Americans that recent rises in inflation were due to the global trend of rising commodity prices and were not likely to be sustained. Despite the more hawkish tone from some Fed officials recently, Bernanke’s sentiment was echoed by Atlanta Fed President, Lockhart, who suggested that inflation was to remain moderate and as well as Christopher Waller, a key Fed researcher, who said that the asset purchase and bond buying scheme would be implemented in full. The shifting opinions of Fed members will be under further scrutiny when the Fed minutes are releases this evening, with the market looking for further hints on the Fed’s policy outlook and prospect for interest hikes in 2011/12. The only other data of any significance out of the US today is the ISM manufacturing index, which gives an insight into conditions in the US manufacturing sector, although this is unlikely to be a market mover.

EUR

The single currency was fairly range bound versus sterling yesterday but it remained near a five month high against sterling and tested a similar high against the greenback. The recent strength in the single currency has been due to the expectation that there will be a 0.25% rate hike announced by the ECB on Thursday. Any further pressure from the euro may be limited in the short term as speculators and investors have now positioned themselves for a rate hike on Thursday and factored in the potential for two more increases before the year is out. It is widely anticipated that the European central Bank will opt to raise interest rates for the first time in just under three years in the meeting on Thursday, but any U-turns in policy could see extreme volatility and speculators unwinding recent positions. Despite the euro rally of recent months it is important to remember the on-going debt crisis in lagging peripheral members of the EU such as Ireland, Portugal and Spain. Yesterday the respected Economist Intelligence unit in Chicago released a survey that suggested the on-going debt crisis meant that the end of the Eurozone as we know it still stands at one in seven. This number seemed all the more poignant as Irelands’ first quarter budget deficit doubled from the same period last year to over 7.1 billion euros.

Further news this morning includes ratings agency Moody’s downgrading Portugal to Baa1, as Fitch and S&P have already done. Moody’s said that retaining this level is dependent on Portugal’s ability to secure sustainable funding.

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Written by Tom Tong

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