Sterling drops versus euro; markets await CPI data

Tom Tong17/May/2011Currency Updates

GBP

The pound looked vulnerable yesterday ahead of a raft of data releases this week. Sterling fell against a firm euro and made small modest against the dollar. The worry for sterling’s prospects at the moment is that we may be entering a period of deteriorating growth and higher inflation, which does not bode well for the long term recovery of the economy – and from a speculators’ perspective does not provide the correct conditions for a hike in interest rates. Today we will see the CPI figures, which are expected to show a small increase from March. Whilst traditionally this would put pressure on the BoE to consider increasing rates, the current spate of shaky data has put question marks over the state of the recovery and MPC members may feel that it is too much of a risk.
Tomorrow we see UK jobs data and the release of the latest MPC minutes, with the important retail sales figures also printing on Thursday. If we see a shift in tone and strong number, the pound could see a rally towards the end of the week – but the market is nervous with the pound remaining under pressure, especially if we see weak data and a dovish tone from the MPC.

EUR

The euro lumbered from a seven week low point against the greenback as the furore over Strauss Kahn’s dissipated slightly and the EU debt meetings made progress. After a unanimous vote key European finance ministers in Brussels approved an emergency 78 billion euro bailout initiative for Portugal. However, there is still concern for the single currency as the bailout must now be ratified by all European governments, with most countries expected to put the measures to a parliamentary vote. There is still concern over the Greek situation, with the country still expected to restructure its debt pile sooner rather than later – although comments from Angela Merkel over the negative effect of any restructuring prior to 2013 and her determination to avoid such a scenario did help to support the currency. At 10am today we see the German ZEW survey data, which if positive will further illustrate the two speed recovery in the single currency zone.

USD

The dollar lost some ground against the euro and sterling yesterday as the recent commodity driven relief rally ran out of steam and the situation in Europe seemed to take a step closer to resolution. As finance ministers in Brussels’s moved forward with tackling the Portuguese bailout and shook off the concerns that IMF leader Strauss Kahn’s arrest would delay proceedings, the dollar lost ground against a firmer euro. The greenback also lost ground against a bundle of its most traded counterparts as news of disappointing US data filtered through. The Federal reserve bank of New York highlighted concerns over economic conditions in the US as its general economic index fell significantly month on month.

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Written by Tom Tong

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