Pound-Euro Tug of War Continues
The sterling-euro tussle continued yesterday following what were inevitable decisions by the respective central banks regarding interest rates decisions. On one side of the channel, Mervyn King maintained the decision to keep rates at 0.5 percent. However, the rather more bold character that is Jean-Claude Trichet decided that despite Greek turmoil, rates would be increased by a quarter percent. Now, whilst there were no gasps of surprise at these decisions, the markets went into a volatile frenzy as the sterling-euro pairing gave us all severe bouts of motion sickness.
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Pound Sterling – UK Markets
Following on from yesterday, sterling fell to a more than one week low versus the dollar. Earlier expectations suggested that figures for producer price index in June would indicate the market has somewhat stagnated. However, shock horror, they actually came in better than expected. Whilst this is a positive reading for sterling in itself, we the consumer will feel the pinch as the price of overall goods have once again been hiked.
Yesterday’s data was hard to comprehend with manufacturing coming in slightly better than expected, whilst industrial production brought us spiralling back down to earth. Afterwards, as we know, interest rates were kept on hold as expected. Sterling is not due any abrupt surprises until at least Monday as our markets put their feet up for the weekend. However, hold tight for US data released this afternoon that could influence the cable.
US Dollar – US Markets
Take note of data stemming from the US today as economists predict that the worlds largest economy may show that they added jobs for a ninth consecutive month. Furthermore, nonfarm payroll figures are expected to show a large increase.
The emphasis placed on the figures due to be released today are of huge importance to the US economy which is still facing a debt crisis of epic proportions. Positive readings as far as employment is concerned will continue to aid a potential interest rate rise at some point in the future whilst negative readings will ensure rates are kept near zero. Should these two sets of data come in as expected, the Dollar ‘should’ strengthen. However, based on yesterday’s events don’t be surprised if the markets react in an unpredictable fashion.
Euro – European Markets
As if we didn’t already consider Jean-Claude Trichet a bullish character, yesterday’s rate hike appears to signal just the start of further increases. Trichet once again intimated that a further rise may not be to far afield. He commented to the fact that his immediate task is to ensure that “recent price developments do not give rise to broad-based inflation pressures over the medium term”.
Just as we thought Trichet was keeping well away from issues facing Portugal he stated that policy makers had loosened collateral rules for Portuguese bonds to support local banks. This move suggests that the ECB is willing to maintain liquidity in the market but it does expose the central bank to overall risks on defaulted bonds.
Other Currencies – Highlights
In anticipation of positive news on German exports and US jobs figures the Japanese Yen is set for a weekly drop against most of its major peers as demand for safe haven currencies fall. This data has come as a surprise following a week where the nation saw positive signs in manufacturing following the recent disasters.
However, perhaps more surprisingly, the Swiss Franc, a common go-to safe haven currency slid for the second day against its major counterparts. Whilst down under, the Australian Dollar reached a near two month high against the greenback as a global rally in stocks supported demand for higher-yielding assets.