Political uncertainty from the euro zone as the UK struggles to control inflation levels, while the US shines with positive economic data

Tom Tong27/Feb/2013Currency Updates

GBP

The main event of yesterday for sterling was the BOE’s Inflation Report hearing, in which Mervyn King and the rest of the BOE discussed the state of the economy and inflation. As a whole the report was pessimistic, adding to the pounds falling trend over recent days. It stated that the economic recovery will be slow, and inflation will remain higher than the BOE’s target at least until 2016.

A controversial idea was put forward by deputy governor Paul Tucker during the hearing of considering negative interest rates in the UK – this would mean the central bank will charge banks to hold their money and could encourage them to lend out more of their funds and thus boosting the economy. Such a move would have to consider the detrimental impact on savers but with interests at a record low, there is little scope for central banks to use conventional means to stimulate the UK’s weak economy.

The recent fall in sterling will add pressure to the already problematic inflation level, and analysts feel it could fall further as depreciation is continuing to be driven by short-term investors such as hedge funds. There is now without a question a sterling trade in the same way that investors are supposed to play the bank of Japan’s new policies and sell yen. For overseas investors, the currency weakness is offsetting share price gains, making the UK less attractive to investors in these volatile times.

Today we see the 2nd estimate of Q4 GDP; the first estimate came out as -0.3%.

EUR

The euro rose from a seven week low against the dollar as Italian and Spanish bonds trimmed losses on easing concerns that the inconclusive elections in Italy will deepen Europe’s debt crisis. It halted losses from yesterday as Berlusconi acknowledged rival Pier Luigi Bersani’s victory in the lower house and expressed that he is open to a broad alliance in order to avoid a second election. The market view is that political uncertainty in Italy may be euro negative, but it is not as bad as what happened in Greece. Mario Draghi’s “whatever it takes” pledge is a strong deterrent to a sell off and the market is clearly not ready to challenge him yet.

However, on a general outlook of the eurozone, news from the European Central Bank confirms that banks will be paying back 61.1 billion euros of the 529 billion borrowed by 800 banks last February, this week. However, consensus forecasts had been for an initial repayment of about 130 billion; the only way this can be interpreted is that this a negative signal for the help of the European banking system. The uncertainty in Europe is also beginning to affect industry as oil prices also dropped; this is due to worries that the uncertainty is going to impact oil prices.
The major event in the eurozone is Draghi’s speech later this afternoon as well as Consumer confidence figures being released which will be a good indicator of the economy from the general public.

USD

News was much better out of the US, with New Home Sales and Consumer Confidence both looking very positive. Consumer Confidence rebounded, climbing to 69.6 points. This crushed the estimate of 60.8. Not to be outdone, New Home Sales climbed to 437,000; its best showing since May 2010. The estimate stood at 381,000.

Yesterday the Federal Reserve Chair Bernanke testified before the US Senate Banking Committee. Bernanke defended the central bank’s unprecedented asset purchases, saying they are supporting the expansion with little risk of inflation or asset-price bubbles. He also denied that the Fed was engaging in a currency war through its asset purchase programs, and warned lawmakers that automatic federal budget cuts set to begin March 1 will put a significant burden on the economy.

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Written by Tom Tong

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