Sterling turned lower against the dollar and the euro, while gilts rose today on dovish BoE inflation forecasts. Governor Mervyn King did not rule out more quantitative easing which also pressured sterling and other movements today may depend on whether or not a bailout will be agreed for Greece and whether similar measures may be considered for Portugal and Spain.
Pound Sterling – UK Markets
Sterling was down against the dollar this morning due to cautious trading ahead of the release of a BoE quarterly inflation report at 1030 GMT. It then extended losses after BoE governor King said the central bank will keep its options open and further quantitative easing will follow if needed to keep CPI on track. The pound fell well over half a cent against the dollar to hover near USD1.5680 before the inflation report was released. The report said that British inflation would stand well below the two percent target in two years' time if interest rates rose as fast as markets envisaged.
US Dollar – US Markets
On the other side of the pond markets are preparing for the release of testimony by Federal Reserve chairman Ben Bernanke on the central bank's strategy for exiting from policies designed to stimulate growth. The outcome of this could well provide additional support for the dollar if Bernanke indicates the US is heading for the stimulus exit.
In the meantime the dollar has continued to drop against the euro, largely due to speculation regarding a possible rescue plan for Greece. US currency traded at 0.7262 versus the euro at the time of writing.
Euro – European Markets
The euro started a rebound yesterday on hopes that a German backed plan to help Greece with its deficit would come to pass this week after tomorrow's meeting of European finance ministers.
Speculations regarding a possible bail-out plan have ignited demand for higher-yielding assets and strengthened the euro, particularly against safe-haven assets such as the dollar and the yen. However, a bailout also raises the question; if Greece now, then who is next?
Other Currencies – Highlights
The yen's bullish run came to a halt yesterday to fall 80 pips against the dollar, over 200 pips against the euro and about 250 pips against the pound. In addition to a revived demand for higher yielding assets, a Chinese stock rally has driven investors to buy back riskier currencies such as the euro and the pound.
Sterling Rises on Hopes of EU Softening Tone on Backstop