Currency Update

The Pound has slipped back further yesterday as yet more weak economic figures were released for the UK, and there is a gathering sentiment for a rate cut today, although the consensus is still for rates to be on hold. There were large falls in the Nationwide bank’s measure of UK confidence, and a fall in industrial output for the UK. These weak figures continue the trend from the service and manufacturing PMI, with retail sales also mixed (current volumes of sales seem to be driven by heavy discounting). Our economists have been expecting a rate cut today for some time, and some others in the markets have slowly come around to this view, with many of the rest expecting a rate cut next month, if rates are kept on hold today. The Pound has slid down towards 1.95 against the US Dollar, a 10 week low, but has stayed relatively buoyant against the Euro which has been weakened by it’s own bad economic news.

The Euro also has a rate decision today, however unlike the MPC the ECB are universally expected to keep rates on hold. Eurozone Inflation is much higher than the ECB’s target, over 3% with the target around 2%, so even the weak retail sales figures from yesterday, a drop of 0.4% when a bounce from last months weak figures was expected, will not move the ECB from their conservative approach to cutting rates. The signs of softening in the Eurozone will make rate cuts more likely once inflation starts to moderate, and is likely to soften the rhetoric in the post decision press conference. The Euro has dropped on the back of the figures, allowing the Pound to climb back above 1.27.

The Euro has also dropped down to around 1.53 against the US Dollar. The US has already had it’s rate decision, so takes a back seat today, however yesterday a rise in industrial production and comments from a Fed member that the US economy will recover in the 2nd half of the year, and that inflation should now be the Fed’s priority, have further confirmed what many thought that the Fed have ended their rate cutting cycle. It seems a bit soon to be talking of raising rates after pursuing a drastic rate cutting tactic over the last few months, with cuts at every meeting and an even bigger cut in an inter meeting announcement, so the talk may be just talk, and the Fed are likely to wait until consumer confidence has risen to a point that rate rises won’t spook the market, a stabilisation in the housing market would go a long way towards this.

The two rate decisions today dominate the attention of the markets, the US is left in the shadows, although there is the weekly jobless figures, and a speech by the relentlessly pessimistic ex-Fed chairman Greenspan, who is still held in high regard by the markets.

With a UK rate cut expected if not today then by June, even a no change decision is unlikely to strengthen the Pound significantly, however if the ECB press conference is more dovish than previous months, then the Euro may well continue it’s weakening trend of the last few weeks.