Currency Update

Currency Update

The Bank of England delivered what, (almost) everyone expected and kept rates on hold at 5%. The Pound briefly rallied on the back of the decision, however has pretty much everyone is now in agreement that the rate will be cut in June, the Pound fell back to sit just above 1.95 in this morning's trading. The Bank of England didn't release a statement, which is normal, so we will have to wait for the minutes of the meeting to get any detail on the mood or rationale behind the decision, but with a large batch of negative data coming out in the day's leading up to the MPC's meeting, it is more than likely that the cut will come next month.

The Pound has also fallen against the Euro as the ECB not only kept rates on hold, but also delivered a hawkish post decision press conference. With some signs of inflation starting to moderate in the Eurozone, and indications of a slowdown in the Euro economies, a more dovish tone was expected, but Trichet kept to the usual script, focusing on how high inflation still is and seeming unconcerned by any slowdown in Eurozone activity. Indeed so hawkish was Trichet that he said that a rate hike was as likely as a rate cut; this was taken as a bluff by many who still expect rates to be cut, but whereas previously June seemed a likely time for a cut, September or even later now is more probable. The ECB's hawkishness coupled with the expected UK rate cut in June the GBP/EUR rate has fallen back under 1.2650

The hawkish press conference allowed the Euro to bounce back against the US Dollar. The EUR/USD rate had previously dropped as an article in the Financial Times pointed to the US starting to take a line on the Dollar's weakness, and hinting at possible collusion with the ECB to moderate the exchange rates extreme levels, however the ECB decision and comments from Former Fed Chairman Greenspan have brought the rate back to around 1.5450. Greenspan has been pessimistic on the US economy for some time, and his comments that while the economy wasn't in for a doomsday scenario, growth will remain sluggish, and the housing market has further to fall, where tempered by his thoughts that the worst of the credit crunch is behind us and that the Fed's decision to cut rates drastically will ease the liquidity pressures in the money market system.

Today we get insolvency figures for the UK, which will give us a good view of how the credit crunch and the housing slowdown is hitting borrowers. This afternoon we get trade balance figures for the US, with the possibility that GDP growth for Q1 could fall into a negative number, a sharp narrowing in the trade deficit could be needed to keep GDP positive. There is little else out, so it could be a quiet end to the week, with the Pound likely to remain on the defensive.

Michael Corcoran - Assistant Manager |Treasury Solutions | nabCapital™ | A division of National Australia Bank Limited

No Comments

Post a Comment