Sterling fell off a cliff yesterday following a shock drop in fourth quarter GDP figures to -0.5 percent. The currency’s slide was further cemented by Mervyn King’s speech last night focusing on the unpredictable and patchy growth to come as well as the fact that inflation may spike towards 5 percent. Yesterday’s events were so significant that this morning’s Bank of England minutes caused very little market reaction by comparison with most of the content already factored. They offered little to boost the Pound with an interest rate rise being ear marked for August opening the door to ‘stagflation’: a combination of high inflation and stagnant growth which would see the economic recovery stifled. If you are concerned about missing a rate on the back of a spike, speak to your broker about placing a market order which will enable you to set a target rate at which to buy your currency.
Pound Sterling – UK Markets
Sterling, which had recently been gaining on the anticipation of rate hike fueled by high inflation figures, was sent spiraling lower yesterday after shockingly low GDP and a downbeat speech from the Bank of England Governor. The moment the latest growth figures were announced yesterday morning, sterling fell 1.25 percent against the euro and one percent against the dollar within minutes This morning’s Bank of England minutes have given further indication of when an interest rate rise may happen but following the surprise events of yesterday have only had a minor impact on the rates.
One of the key factors from this morning’s minutes which reveal discussions from January’s Bank of England meeting is that an interest rate rise was considered by the committee with two members voting for a hike. Whilst the fact that another member has joined Andrew Sentence’s calls for a hike is generally something positive for Sterling, the minutes also suggested that a rise would not be until August, a little later than some of the recent eager predictions. Other areas of the economy such as mortgage approvals were flagged up as poor.
This comes after yesterday’s shock drop in GDP figures from the fourth quarter of 2010 which sent Sterling on an instant slide lower. This was exasperated further by Mervyn King’s speech last night largely discussing inflation rates – with him warning that inflation could rise to nearly 5 percent before falling back next year. He also warned about the choppy recovery to come with growth still being unpredictable and how rising commodity prices will impact negatively on household cash flow.
US Dollar – US Markets
The US Dollar fell against the Euro yesterday but took a steep step up against Sterling after a mixed data day. Weakness against the Euro was also attributed to Obama’s state of union address in which he proposed a partial spending freeze. Today sees the FOMC meeting on interest rates and monetary policy.
Yesterday’s consumer confidence was surprisingly strong coming in well above the forecasted reading of 54.5 at 60.6 which helps to account for the surge against Sterling. Gains were tempered however by the President Obama’s State of the Union speech in which he proposed a partial spending freeze to save $400 billion from the budget over the next decade. The view is that if this were to go ahead the reduction in spending lead to more weakness in the Dollar.
The FOMC meeting today is widely expected to result in no change to interest rates or the monthly bond buying. What may interest markets however is that the voting panel has changed with four new members – this may make for interesting reading in terms of the tone of the minutes for economic prospects once they are released. New home sales and mortgage data are also due this afternoon.
Euro – European Markets
The Euro has maintained a two month high on the US Dollar and also edged up further against Sterling following the poor UK GDP figures yesterday. The Euro has also benefited from yesterdays EFSF bond auction which stimulated good demand from Asia. However struggles between nations and within nations themselves are still being reported in the press. Guido Westerwelle, one of the German coalition partners, has commented that boosting the size of the EFSF funds is not convincing. These divisions in Europe and whether or not the rescue fund package does get enlarged may be factors in terms of Euro movement in the medium term.
Other Currencies – Highlights
The Mexican Peso has fallen following comments from the Finance Minister that have stoked speculation that the Government may intervene to weaken the currency.
The currency has gained 6.4 percent in the last twelve months cutting into the profits of exporters.
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US Dollar Continues to Outperform European Rivals
Pound falls further
British Pound Suffers Losses Ahead of Tuesday's Critical Vote