Sterling rally continues as cable hits 3-month high ahead of FOMC meeting

Tom Tong18/Jun/2013Currency Updates

GBP

Cable reached a new monthly high yesterday, furthering its advance from last week. The UK inflation rate is expected to escalate an annualised 2.6% in May after the month prior’s increase of 2.4%. These increases are coupled by core consumer prices being forecast to increase to 2.1% from 2.0% within the same period.

The UK Prime Minister David Cameron has declared plans for what may be largest bilateral trade deal in history, between the United States and the EU. The formal negotiations, worth hundreds of billions of pounds, were announced just ahead of the G8 summit. President Barack Obama said that the primary round of negotiations would be hosted in Washington in July, with the intention of concluding by the end of 2014. The trade deal, aimed at bolstering exports and propelling growth, is said to be worth £100bn to the European economy with the agreement potentially creating 2 million jobs.

In other news, Paul Tucker, the deputy governor of the Bank of England, is stepping down from his position.

EUR

The eurozone’s trade surplus unexpectedly narrowed in the month of April, according to the latest data from the European Statistics office. The trade surplus for the single-currency narrowed to €16.1bn in April, from €18.1bn the prior month; much lower than the consensus estimate of € 21.2bn. The lower surplus was the result of a 0.8% monthly decline in exports and a 0.5% increase in imports. Despite yesterday’s trade balance report coming in worse than expected, it had a limited impact on the single currency. April’s seasonally-adjusted decline is the first in four months and counters the more recent upbeat news emerging from the Eurozone. It also tapers the European Central Bank’s forecast for an economic recovery in the second half of the year.

The Greek Prime Minister, Antonis Samaras, faces crisis talks with coalition allies over his decision to shut down the national broadcaster, accusing ERT of corruption and waste, as the country struggles to pay its huge debts. If no deal is reached, the government could fall and Greece could slide into fresh elections, plunging the Eurozone back into chaos.
France’s ruling Socialists yesterday called for a weaker euro and changes to EU rules on budget deficits, accusing the centre-right governments of Britain and Germany of creating economic hardship across the European Union. At a conference on Europe, Francois Hollande’s party adopted a policy paper that toned down earlier attacks on German Chancellor Angela Merkel, giving some relief to the French president as he seeks to ease tensions with Berlin.

Data released by Eurostat, the statistical office of the European Union, showed employment in the euro area was 0.5 per cent down over the course of May. Compared with the same quarter of the previous year, it was noted by the body that employment fell by one per cent in the euro area and by 0.4 per cent in the EU27 in the first quarter of the year.

USD

Yesterday was a quiet day in terms of macro data for the USD. The Empire State Index data, which is seen as New York’s general economic gauge, climbed to 7.8 this month, which is the highest reading since March. Readings greater than zero indicate expansion in New York, northern New Jersey and Southern Connecticut. Also sentiment among U.S homebuilders surged to the highest in seven years, reflecting gains in sales as Americans rushed to take advantage of low mortgage rates.

With the Federal Open Market Committee starting its two day policy meeting yesterday, there is much anticipation surrounding whether or not Bernanke will announce that the US central bank will be slowing its $85 billion- a – month bond buying programme. However, if Bernanke reassures markets that the policy will remain intact it could revive investor appetite for riskier assets and put pressure on the low – yielding yen.

In a statement made by The International Monetary Fund (IMF) it stated that deficit reduction programme would be a drag on growth this year, in an annual report on the world’s biggest economy. Apparently it believes it’s forecast growth of 1.9% for 2013 would of been 1.75 percentage points higher if it not had been for the speculation surrounding QE tapering. It believes further QE should occur to stabilise the US economy at least until the beginning of 2014.

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Written by Tom Tong

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