Sterling Soars on Interest Rate Hike Speculation

Yesterday, the BoE Deputy Governor, Charlie Bean, reiterated the Governor’s recent comments that steady recovery in the nation is likely to drive the central bank to hike its benchmark interest rate soon. With inflation remaining a key concern for most of the global economies, this week’s UK and US inflation reports will gauge the trend of inflation in the respective nations. Investors will eye the minutes of the recent BoE meeting later this week for more cues on the tone of the policymakers. In Euro zone, today’s inflation report is likely to confirm that inflation trend continues to ease, thereby shifting focus to the forthcoming releases. Across the Atlantic, today’s industrial output data ahead of FOMC meeting later this week will keep investors interested. Additionally, events unfolding in Iraq will be closed watched and has the potential to alter risk sentiment.

Pound Sterling – UK Markets

Hawkish comments from the BoE Deputy Governor, Charlie Bean, led Sterling to trade on a firmer footing against the US Dollar and the Euro this morning. The Deputy Governor yesterday, reiterated the recent Governor’s comments that the central bank might raise its benchmark interest rate sooner than expected as recovery in the economy continues to remain strong. Meanwhile, data released earlier today indicated that the Rightmove house prices rose at a slower pace for June, thereby easing some fears that the UK housing market is overheating. As inflation continues to remain below the central bank’s 2% target, markets will keep a close watch on tomorrow’s domestic inflation report for May, which is expected to confirm a slowdown in inflationary trend in the region. On Friday, the Pound continued to trade higher against the majors following hawkish comments from the BoE Governor last week. Additionally, Standard & Poor’s rating agency reiterated its “AAA” credit rating on the UK, and raised its outlook to “Stable”, citing that the economy will continue to grow at a healthy rate throughout the year.

US Dollar – US Markets

Geopolitical tensions in Iraq offered support to the greenback against the common currency in Friday’s trading session. However, gains were limited following soft domestic consumer confidence and producer price inflation reports. The Reuters/Michigan consumer sentiment dropped to its lowest level in three months for June. Separately, the US producer price inflation unexpectedly slowed for May, driven largely by weaker food and gas prices, providing evidence that inflationary pressures remained benign despite two straight monthly gains. Against this backdrop, markets will keenly await tomorrow’s consumer price inflation data for May for further direction as well as the FOMC meeting later this week. Meanwhile, the US Dollar is trading in a tight range against its major peers this morning. Going forward, markets will keep a tab on US industrial and manufacturing production data which are expected to rebound for May, thereby strengthening views that the economy is improving at a steady pace. With the housing market concerns continuing, this week’s housing market reports will be keenly eyed to gauge the recovery in US housing market during the second quarter.

Euro – European Markets

The common currency is trading on a weaker footing against the US Dollar this morning. In the wake of easing inflationary trend in most of the Euro bloc regions, today’s Euro area inflation report is expected to chart similar movement. However, with the ECB easing its policy stance earlier this month, the focus has shifted to the forthcoming releases in Europe. Furthermore, the ECB indicated that it will act swiftly with further monetary policy easing, if any required. Additionally, today’s US industrial production along with tomorrow’s German ZEW sentiment indices will influence trading sentiment in the Euro-US Dollar pair going forward. Apart from the domestic inflation report, events unfolding in Iraq will be closely followed by investors in the session ahead. On Friday, the Euro dropped against the US Dollar amid growing geopolitical tensions in Iraq. However, the losses were capped following disappointing US Reuters/Michigan consumer confidence and producer price inflation reports. Separately, data released earlier on Friday indicated that Euro zone trade surplus widened less than expected for April.

Other Currencies – Highlights

The Kiwi Dollar is trading in a tight range against the greenback this morning. Data released over the weekend indicated that New Zealand’s Westpac consumer confidence eased marginally in the second quarter, as higher interest rate and lower dairy prices weighed on the sentiment. Additionally, housing inflation took a hit after prices in the New Zealand real estate market declined for the first time in four months as restrictions on mortgage lending dampened demand for homes. Meanwhile, with the Reserve Bank of New Zealand (RBNZ) showing no signs for slowing down the pace of raising its benchmark interest rate, investors will await more economic data going ahead, especially the GDP numbers later this week, to gauge impact of the interest rate hike on the nation’s current economic growth. Furthermore, the US Fed monetary policy meeting this week might provide further direction to the New Zealand Dollar in the coming sessions.