Pound and dollar strengthen as euro drops back

Tom Tong14/Mar/2014Currency Updates

GBP

The pound seems set to end a disappointing week in slightly better shape than feared after yesterday’s appreciation. Sterling gained half a cent on the euro over the course yesterday, although it did drop against the dollar, effectively wiping out those gains made in the middle of the week.

The pound, which outperformed the euro and the dollar in 2013 with a 13% appreciation across the board, has had a slightly harder time of it in the last month. Stronger performances from the single currency and the greenback have halted the pound’s progress, and in the euro’s case caused an active sell off to the tune of about 1.7% this month already.

The market, however, is still betting on the BoE being the first of the major central banks to raise interest rates, which is keeping the pound high. The continuing strength against the dollar is also in part due to the recent lapses in US economic data, and Stanley Fischer, nominee to be Janet Yellen’s deputy, announcing yesterday that the US economy needed extra stimulus put more weight on the dollar.

There was no data out yesterday. Today’s trade balance expected to be pretty much in line with the average of the last year or so, might make some waves if it does anything it’s not expected to.

EUR

The recent meteoric rise of the single currency was checked slightly yesterday as it lost ground on the dollar and sterling. A lack of data from the Eurozone meant that the euro was exposed to positive sentiment from the UK and US, which was ultimately the cause of the euro’s performance.

The continuing strength of the euro, coupled with the deflationary pressures in the Eurozone, raises interesting questions about the appetite central banks have for a strong currency that, in times of recovery, is actually a hindrance to economic and price growth. Mario Draghi took the unusual step yesterday of directly addressing the strength of the currency in his monthly report, essentially going only so far as to say that it is something they are aware of and monitoring.

The continuing strength in the euro has continuously surprised investors since the beginning of the year, but in fact with hindsight, it is perhaps not so difficult so understand why. The European Central Bank, which controls the currency, is in charge of the largest economy in the world and consequently is inherently stable. The bailing out of struggling economies like Greece and Ireland has shown the lengths the ECB is willing to go to protect its members. The crisis in Eastern Europe, economic troubles in Japan, and the Swiss government’s continued introversion have made the euro appear to be a relative safe haven. While interest rates are at record lows, Draghi has avoided direct market intervention, or quantitate easing, in the style of the US or the UK. All of these factors, combined with the extremely bullish approach of the world’s most powerful central banker, have apparently convinced markets to liquidate their short positions and begin investing long term. Barring any major shift in economic sentiment from the big three, it is easy to see the single currency sticking at these levels for time to come.

Today we have German inflation data, as well as construction output and employment change from the Eurozone as a whole.

USD

The Greenback had a much better time of it yesterday after a torrid few weeks, particularly against the euro. Coming off the back of a raft of positive data released over the course of the day, the dollar managed to take 0.6% from the pound and the euro.

Every bit of data released from the US yesterday came in to the upside. Import prices jumped to 0.9%, retail sales mom for February grew by 0.3% after last month’s 0.6% contraction, and storages of natural gas beat forecasts by 4bn to decrease by 195bn. We also saw initial and continuing jobless claims fall by more than predicted, and are now at 315k and 2.855m respectively.

The dollar is still flailing around record lows against the euro, and is only slightly above similar levels against the pound. It is hard to say whether or not the strength of the currency bothers the Fed, or if they are in fact glad of its weakness. As mentioned above, a weaker currency can be an asset when trying to induce growth and inflation. The Fed at least, will not be basing their QE or interest rate decisions on the revival of the currency.

Today sees US inflation data released, as well as a special Reuters consumer sentiment report.

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Written by Tom Tong

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