Currency Update

Currency Update

The fine weather at the weekend may have raised everyone's spirits, but it hasn't helped the Pound, which is still down after last weeks events. The decision of the MPC to keep rates on hold, could have been expected to offer Sterling some support, but with a series of weak economic reports - consumer confidence and industrial output measures both falling, plus a declining house market - the market is heavily skewed towards expectations for a rate cut in June, bringing Sterling lower. The Pound has particularly dropped against the US Dollar, which has been buoyed by thoughts that the US Fed has done what is needed (or all it can) in terms of rate cuts and that we are now at bottom of the US rate cycle. Friday saw a narrowing of the US trade balance deficit which was also a boost to the USD, and has made thoughts on Q1 GDP a bit more optimistic, a widening of the gap may have seen a negative GDP figure, the narrowing may have brought it up to around 1% growth. The Pound has fallen below 1.95 against the USD and remains vulnerable to any further weak reports.

The decision by the ECB to keep rates on hold was widely expected, but the hawkishness of the comments made by Trichet in the post decision press conference were not. His comments that the next move could even be up rather than down, initially gave the Euro a boost. The single currency climbed back up to around 1.55, before traders looked again at the numbers coming out of the Eurozone economy, weakening numbers and declining, although still high, inflation figures, and decided that Trichet's speech was just bluster and that the Euro's next rate move will be downwards, although possibly not for a while. The Euro fell back towards 1.54, but still stayed strong against the Pound keeping the GBP/EUR rate down to below 1.2650.  

The UK takes centre stage at the start of this week, with inflation in the spotlight. We have producer price index numbers this morning, plus BRC retail sales, and another house price survey released at midnight tonight. Tomorrow sees the latest CPI release, so with the focus firmly fixed on inflation today's PPI is likely to show further pressures in the system. PPI inflation, bother input and output, have been at high levels for some time, but we have yet to see it really feed through to the high street. Today's release is likely to show a further tick upwards in prices, but is unlikely to shake a market waiting for tomorrow's CPI.

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