Markets await dual interest rate decision

Tom Tong09/Jun/2011Currency Updates

GBP

All eyes will be on the BoE’s official rate decision out today. With rates expected to stay at 0.5% in the short term it’s not expected to have a massive impact on the markets given that details of the policy debate will not be known until the minutes are released in two weeks’ time, when all eyes will be on any indication of a future rate hike. The fragility of Britain’s economy is holding the BoE back from raising rates even as inflation risks remain stubbornly high.

On Wednesday sterling fell to a one-month low against the euro and slid against the dollar after a media report quoting a Moody’s analyst saying the UK was at risk of losing its top-notch rating. According to the report, the analyst said the UK could lose its AAA rating if growth remained weak and the government failed to meet its fiscal consolidation targets. The rating agency subsequently said its outlook for Britain was stable, though it might reconsider if targets were missed.

EUR

The euro was moderately weaker Wednesday morning amid reports that Germany and the European Central Bank are at odds about whether the private sector should bear some of the burden of rescheduling Greek debt. German officials told the ECB that Greek rescue plans should include the ‘voluntary participation of the private sector in case of a new aid package for Greece.’ The ECB, which makes its latest interest rate decision today followed by a much-watched press conference, fears that Europe’s fragile banking system would be threatened by such a move. Even with Europe dragging its feet on additional aid for Greece, the euro has held near monthly highs versus the dollar amid concerns the US economy has lost momentum.

The 17-nation euro area growth quickened in the first quarter on investment and government spending, which raises the chances of a rate hike next month. However, the overall growth masks divergences in the performance of member nations. The economy expanded 0.8% sequentially in the first quarter, second estimates published by Eurostat showed Wednesday. The growth rate matched flash estimate released on May 13. The growth rate far exceeded the 0.3% expansion in the fourth quarter of 2010, which was held back by December’s severe weather.

Elsewhere, German exports fell back from form 7.2% in March to 5.5% in April,pushing down the trade surplus below expectations. On an annual basis, the growth rate slowed to 13.4% from 15.7% in the prior month. However as a whole in the first quarter, the largest Eurozone economy expanded 1.5%, more than double the 0.4% growth seen in the previous three months.

USD

T he dollar clawed back some of its recent losses against the euro but extended its monthly lows versus the yen on Wednesday. Traders continued to assess Tuesday’s speech from Federal Reserve Chairman Ben Bernanke, who acknowledged that the US economic has lost momentum. Bernanke said that he still expected growth to pick up again, and offered no indication that the Fed will extend its expiring quantitative easing program

Elsewhere

New Zealand’s central bank on Thursday decided to retain its benchmark interest rate at record low for a second straight meeting, but signalled that a gradual increase is required to offset a potential rise in core inflation that has been expected.

Policymakers at the Reserve Bank of New Zealand, or RBNZ, led by Governor Alan Bollard, left the Official Cash Rate, or OCR, unchanged at 2.5% after reducing it by 50 basis points in March following the Christchurch earthquake. The decision was in line with expectations.

Japan’s gross domestic product contracted a revised 3.5% annualized in the first quarter of 2011, the Cabinet Office said on Thursday – missing forecasts for a decline of 3.0% following last month’s preliminary reading for a 3.7% fall.

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Written by Tom Tong

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