Sterling makes gains on positive retail sales figures as deadline set for Cyprus resolution

Tom Tong22/Mar/2013Currency Updates

GBP

The British pound climbed to a fresh monthly high against the dollar yesterday as retail spending in the U.K. jumped 1.9% in February, to mark the biggest advance since April 2011, while public sector net borrowing increased GBP 4.4B during the same period amid forecasts for a GBP 8.2B rise.

The pound started the day on a bullish trend after market expectations for looser policy from the Bank of England was pushed back as Britain’s finance minister did not change the central bank’s remit as drastically as some had anticipated. Minutes from the latest BoE policy meeting, showing less support for further asset purchases with some monetary policy committee members voicing concerns about the weak currency, also lifted the pound as investors who had bet against it were forced to cover their short positions.

As the fundamental developments coming out of the U.K. encourage an improved outlook for growth and inflation, we should see sterling continue to retrace the sharp decline from the previous month, and this rebound to the upward looks poised to gather pace over the near to medium-term as the Bank of England (BoE) appears to be slowly moving away from its easing cycle.

EUR

The euro weakened yesterday as manufacturing and service-based activity in Europe contracted at a faster pace in March, while the European Central Bank (ECB) warned it would ‘maintain the current level of Emergency Liquidity Assistance, ELA, until Monday, 25 March 2013’ for Cyprus as the region struggles to secure a bailout. This had effectively set a deadline for the latest ‘crisis’ to be resolved.

As the Cypriot parliament votes against the levy on commercial bank deposits, the government now plans to draw up an ‘investment solidarity fund’ to recapitalize the banking sector, and is also seeking a EUR 5B loan from Russia as the EU maintains a reactionary approach in addressing the ongoing turmoil surrounding the region.

As the fundamental developments coming out of the euro-area point to a deepening recession, we should see the central bank push the benchmark interest rate to a fresh record-low, and the Governing Council may have little choice but to carry out its easing cycle throughout 2013 as the economic downturn threatens price stability.

For today, only Germany will release some interesting figures from the IFO Institute. Business Climate, Expectations and Current Assessment, which are all expected to show better numbers than their previous. However, yesterday we saw German market manufacturing PMI and Eurozone PMI disappoint and the euro sell of accordingly.

USD

Although U.S. Existing Home Sales increased 0.8 percent in February amid projections for a 1.6 percent print, the Philadelphia Fed survey advanced to 2.0 in March to mark the first positive reading since December, and the economic docket for the following week may trigger another short-term bounce in the dollar as the final Q4 GDP report is expected to show the growth rate increasing 0.5 percent versus an initial forecast for a 0.1 percent rise.

The currency had little reaction to the FOMC decision and statement yesterday, as the Fed held to its previous comments. The only deviation was the working that said that the US economy was showing a better recovery, but job markets were still weak but improving.

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Written by Tom Tong

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