Euro loses early gains after sentiment overheats

Tom Tong10/Jun/2011Currency Updates

GBP

As widely expected, Thursday saw the Bank of England’s Monetary Policy Committee vote to hold the interest rate at the current record low of 0.5% for the 27th straight month (rates were cut to their current level in March 2009) and maintain the level of gilts purchases (Quantitative Easing) at £200bn. The decision was made despite the more than double the 2% target rate recent posting of April’s annual YoY CPI inflation rising to 4.5% from the 4% figure for March.

However, data posted in recent weeks have pointed to weak consumption and the release of minutes from earlier meetings show that a majority of the nine MPC members want to see that demand is on a sure footing before rate rises begin.

A number of Purchasing Managers Index surveys over the past two weeks have pointed to a slowdown in private sector job creation, falling demand in the UK’s key services sector and a significant slowdown in the manufacturing sector, which has been a bullish performer within the economy in recent months.

Household consumption shrank in the first three months of this year, after a more modest contraction at the end of 2010, and it is not clear that demand has really picked up.  A recent retail survey showed that sales, which had picked up with warm weather, felll back in May.

Prices are rising at more than twice the rate of the MPC’s target for inflation and three members of the 9-member committee have voted to raise rates in recent months. However, the most outspoken advocate of higher rates on the MPC, Andrew Sentance, has just seen his term expire.

Today sees the release of UK producer prices, Industrial and Manufacturing Production.

EUR

The euro failed to hold on to initial gains after Jean-Claude Trichet, president of the European Central Bank, signalled a likely Eurozone interest rate rise next month.  As expected, the ECB left its rate on hold at 1.25%

However, the focus of market attention was the post-decision press conference.  Mr Trichet used the words “strong vigilance” to describe the ECB’s stance towards inflation risk – a phrase that in the past has signalled a rate rise at the central bank’s next meeting.

The market was expecting the ECB to signal that it would raise rates in July after tightening monetary policy for the first time since the start of the financial crisis at its April meeting. Recent economic data from Germany in particular would appear to justify a rate rise next month, overriding concerns over the fiscal health of the Eurozone periphery.

After a sentiment driven rally in the wake of Mr Trichet’s comments, the euro slipped back.  A “buy the rumour, sell the fact” response, given that the market had spent the past few weeks pricing in a July rate rise. The euro fell 0.4% against the dollar and was 0.2% weaker against the pound.

Now that this closely watched meeting is out of the way perhaps the market will refocus on the restructuring of Greece’s sovereign debt.  The euro may have seen its best levels for some time.

This morning saw the release of flat German CPI figures and the release of poor French industrial Production figures.

USD

In the United States, record exports in April tempered fears that the economic recovery was running off the rails, even though first-time claims for jobless benefits edged higher last week.

Investors are waiting for cues from the US Federal Reserve on its future policy moves as the $600 billion bond purchase program is due to expire at the end of the month.

Friday should see the market focus on underlying trends – but the probability of a major shift through the closing 12 hours of the week is much lower than it was in the preceding sessions. Today’s economic data brings both the monthly budget report for May (important given the warnings of a possible credit watch change on US sovereign debt recently) and imported inflation levels for the same month. Neither is more influential than the April trade balance (a smaller-than-expected $43.7 billion deficit). The risk of a major trend developing today is low.

CNY

Today saw the release of a poor Balance of Trade figure – 13.1bn against an expected 19.8bn, casting a shadow of potential further international economic slowdown.

Print

Written by Tom Tong

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