Sterling suffers further losses. Euro and dollar mostly flat

Tom Tong18/Mar/2014Currency Updates

GBP

Monday blues for sterling yesterday with the currency caught slipping against both the euro and dollar.

Significant losses were recorded against a resurgent euro and sterling is now hovering close to 2014 lows.

After a bullish run kicking off in the middle of last year, doubts are creeping into investors’ psyche; the majority now feel that the improvements in the UK economy and the prospect of an interest rate rise next year are widely priced into the current sterling price, therefore presenting a harder environment for further gains. Last week’s UK data was a perfect example, construction and industrial output showed a 3-5% rise yet sterling gains were minimal.

The key play for sterling will come on Wednesday with the curtain lifting on UK unemployment and wage numbers, this is coupled with the release of the BoE minutes which should shed more light on the outlook for monetary policy. The street is calling a 25,000 dip in the number of people out of work whilst real wages are expected to have risen 1.2% YoY. Naturally this presents an increased chance of volatility if the figures come in offside. However the BoE minutes could prove equally interesting.

No data of note out today. However Carney will deliver a speech this afternoon and reveal a slight reshuffle of the BoE, the announcement of a new deputy governor and a change in the structure of the BoE is unlikely to induce any market movement; however comments on the wider economic situation could produce pivots.

EUR

The euro shrugged off a slip in inflation and closed with slight gains against both the pound and dollar.

Eurozone annual inflation retreated in February to the level that triggered the surprise interest rate cut in November – this further serves to underline deflation risks remain present and continue to cause headaches among the ECB. The inflation rate scuttled in at 0.7% in February against 0.8% in January.

The reading was the joint lowest in 4 years and a touch below the initial Feb estimate of 0.8% Annual inflation last fell to 0.7% in October, a decline that turned Draghi’s head in alarm, producing the controversial cut in interest rates to all-time lows of 0.25%. A defensive play against the threat of deflation.

The ECB, which targets inflation close to but below 2%, considers the risk of Eurozone deflation as limited. This was reinforced by Draghi’s reassuring comments last week which served to produce a euro bull run with hot money backing the euro.

Data of note today includes- European trade balance.

USD

London closed with the dollar scalping gains against the pound, however it dipped slightly against the euro.

Good news for US manufacturing yesterday, industrial output hit record highs in February. The jump is important as it is the biggest rise since last summer and more than reverses the 0.2% drop in January. The data paints an encouraging picture for the wider US economy, suggesting there is still room for wider growth.

Spotlight again on the Fed today. The central bank is anticipated to leave rates untouched and continue tapering its bond purchases. But the Fed could tweak its methods for communicating how long interest rates will remain low.

Yellen’s term as US Fed chair begins tomorrow. Her first MPC meeting is also likely to be her most significant, with all in the market keen to ascertain how she intends to approach QE and an interest rate alteration. Ultimately the Fed is likely to adapt its forward guidance on future interest rate and articulate how it intends to act upon unemployment dipping below its threshold of 6.5%-, the level above which, it says it will not raise interest rates.

Plenty of data out of the US today- CPI and the Redbook index.

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Written by Tom Tong

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