Markets await MPC rate decision

Tom Tong05/May/2011Currency Updates

GBP

There was little movement from the sterling yesterday as markets awaited the interest rate decision from the UK and the ECB, due later today.

The interest rate decision is out today and a slowdown in March inflation as well as weak economic activity suggests that the UK central bank is unlikely to favour a rate hike in May. At the end of the two-day rate setting meeting, the Bank of England’s nine-member Monetary Policy Committee is widely expected to maintain its record low interest rate. The interest rate has been at the current 0.5% level since March 2009, which is the lowest since the bank was established in 1694. The central bank is also set to leave the size of quantitative easing unchanged at GBP 200 billion. Governor Mervyn King told EU parliament earlier this week that an increase in the long-term interest rates could pose massive economic challenges, given the high level of indebtedness. Raising interest rates would add to the expense of the governments across Europe.

Elsewhere, British house prices recorded an unexpected fall in April as tight fiscal policy and weak consumer sentiment kept buyers away from the housing market. House prices were down 0.2% month-on-month in April, survey data from the Nationwide Building Society showed Wednesday. Economists had expected a 0.1% rise for April after March’s 0.5% increase. Prices declined for the first time in three months.

EUR

Portugal’s caretaker government announced a deal with the European Union and the International Monetary Fund on a three-year bailout package worth 78 billion euros ($115 billion) for resolving the EU member-nation’s financial problems.

A key survey showed Wednesday that Eurozone private sector growth improved in April as expected boosted by manufacturing output, but official data revealed that retail sales decreased in March at the sharpest pace since November 2009, reflecting the impact of fiscal squeeze as well as rising inflation.

The final composite Purchasing Managers’ Index rose to 57.8 in April from 57.6 in March, a survey from Markit Economics showed. A reading above 50 suggests expansion in the private sector. But this solid growth, driven largely by France and Germany masked divergences in peripheral nations.

USD

The US dollar showed mixed performance on Wednesday, paring its Asian session gains against the European majors while holding some ground against the yen as the recent run of risk-sentiment faded on renewed fears over more monetary tightening in China and fears of a revenge attack by Al Qaeda terrorists.

Private sector employment in the US saw continued growth in the month of April, according to a report released by Automatic Data Processing, Inc. on Wednesday, although the pace of job growth fell short of economist estimates. The report said non-farm private employment increased by 179,000 jobs in April following an upwardly revised increase of 207,000 jobs in March. Economists had expected an increase of about 200,000 jobs compared to the addition of 201,000 jobs originally reported for the previous month.

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Written by Tom Tong

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