Here Comes The Interest Rate Clash

Exchange rates are set to undergo volatility this week as the day looms when both the Bank of England and European Central Bank will be announcing their respective interest rate decisions within an hour apart on Thursday morning. There is no certainty that there will be a rate hike from Europe but this generally expected to occur, whilst once more rates from the Bank of England are expected to stay the same. The last few weeks have already weakened Sterling and made the Euro more and more robust in advance of the announcements so this is likely to continue and possible intensify in the final run up this week.

Pound Sterling – UK Markets

The Pound is still in a weak position against the Euro at some of the lowest levels for five months. Movement so far today since the early hours has mainly shown gains on the Euro albeit to the low levels seen of late with similar mild upwards movement taking place against the Dollar since Friday. Strong PMI construction data this morning has also helped. This morning’s PMI construction data which came in above forecasts will ease some of the fears caused by last week’s PMI manufacturing data which fell far short of expectations. As some of the first insights into the second quarter performance, the PMI data is quite significant. The data always comes in a run of three and PMI services data is due tomorrow. The services sector is usually the sector of the three that performs the worst. Halifax home prices are expected to show signs of growth tomorrow however really dominating markets this week will be interest rates. The UK and European interest rate decisions are both due on Thursday and with European rates set to rise whilst UK rates are maintained, there is not much scope for the Pound to vastly improve this week.

US Dollar – US Markets

The Dollar has fallen against both Sterling and the Euro since Friday with the wave of positive data from the US on Friday in the areas of non-farm payrolls, unemployment and manufacturing not having much lasting impact. The currency did however strengthen on the Yen and Swiss Franc as the non-farm payroll data in particular shot up to 216,000 above the target of 190,000. However, mixed remarks about whether or not an interest rate rise is appropriate or not from Federal Reserve officials, revealed a lack of support for a rise and has dampened the Dollar in the week when European rates are set to rise.

Euro – European Markets

The Euro has risen against the Dollar since Friday, but has been making some mild losses against Sterling this morning as positive PMI construction data came out in the UK whereas Sentix investor confidence in Europe fell below target. Focus however is on European interest rates before the decision this week with the Euro close to a five month high on the Dollar. The likelihood of interest rates rising is over-compensating for concerns about nations such as Portugal undergoing rating downgrades. There is still some uncertainty over whether the interest rate rise will occur as there are concerns that it will damage some of the peripheral nations. Europe is experiencing two levels of recovery with nations such as Germany in a much more advanced stage than that of the struggling nations who it is feared will suffer under an interest rate hike.

Other Currencies – Highlights

An interest rate rise is expected to be announced by the Polish Central Bank tomorrow in a move designed to deal with high inflation levels. The interest rate is expected to move up by a further quarter point to 4 percent. This comes as inflation for February was at a rate of 3.6 percent exceeding the target of 2.5 percent for the fifth month. The Polish Zloty gained on the Euro over the course of last week.