Sterling gains as tensions ease in the east

Tom Tong06/Mar/2014Currency Updates

GBP

The pound wound its way up across the board yesterday, taking gains of around half a percent. Sterling jumped around 0.5 of a cent against the single currency and slightly more against the dollar in early trading, and managed to hold on at these levels until the end of the day. It has been a volatile week for the pound, due naturally to the situation in the Ukraine, although it is now trading back around last weeks levels.

The strong performance yesterday morning was due to just a small amount of data out of the UK; markit services PMI saw an increase of 0.2 above expectation, to 58.2 – a positive reading that shows activity in the services sector is expanding.

The far reaching investigation into Forex market went all the way to the top yesterday, with a member of the Bank of England itself being suspended pending the investigation. The facts, however, still remain unclear and the actual fall out will not be clear until such time as the investigation is concluded.

Today is a more important day for the UK. With the BoE interest rate and QE decision to be made this morning. With tensions easing in the Ukraine markets will be turning their attention back to the more mundane events of the week, so any rhetoric from the governor will be closely scrutinized. However it would be quite a shock if the central bank did anything other than expected, with interest rates to be extended at record lows into a sixth year.

No other data of note out today.

EUR

The euro weakened against the pound and traded a tight range against the dollar yesterday despite business growth in the eurozone hitting a high not seen for 32-months. France continues to be painted as the sick man of Europe as Markit’s latest composite PMI for the service sector showed contraction with a figure of 47.2, whilst Germany and Italy hit two and three year highs respectively.

On another positive note retail sales figures climbed 1.6% in January. All eyes are now focused on the ECB’s monetary policy meeting today at 12PM with most analysts anticipating new easing measures to flight the deflationary pressures in the eurozone. Draghi has been reticent to engage in further QE so he may look to alternative and more inventive tools.

In terms of other data we have German factory orders and a Spanish bond auction this morning.

USD

The weather remains one of the hot talking points in the US as its impacts on the economy is yet to be quantified.

Rebounding auto sales, improving home sales and construction is evidence that the Federal Reserves super-easy monetary policy is having an impact on the economy as these indicators are near to pre-crisis levels.

ISM Non-Manufacturing PMI for February came in below expectations at 51.6, whilst this was below the figure forecasters had anticipated it shows business conditions in the non-manufacturing sector are in growth mode. Despite this reading we forecast GDP for 2014 to hit 3.2% YoY.

Data releases of note out this afternoon are initial jobless claims and Continuing Jobless Claims both for February. The labour market for the US is a key indicator of its economic health, we anticipate the real volatility for tomorrows Non-Farm Payroll.

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Written by Tom Tong

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