Currency Update

Currency Update

The Euro posted a surge yesterday as German producer price inflation increased by more than expected, and managed to overcome a mixed ZEW survey, which showed a particularly weak economic sentiment component, although a rise in the current economic conditions. The Euro was also boosted by comments from the president of the ZEW institute who said that he expected the ECB to raise rates in the near future. The Eurozone economy is seemingly diverging with Germany still posting decent growth, while the economy on the whole is starting to slow. Inflation is still a problem, and there are inflationary pressures building in the background, as they are all over the world, so the ECB may not be in a hurry to cut rates anytime soon, but a rate rise seems unlikely. However the talk of rate rises has boosted the Euro sending it above 1.5650 against the USD, but keeping steady around 1.2550 against the Pound.

In contrast to the Euro, the USD had a bad day yesterday, as a surge in oil prices to a new high, almost at $130 per barrel, and a fall in the stock markets, weighed on the currency. The US had their own producer price numbers, and as elsewhere the global rise in commodity prices pushed them up, to the fastest pace since 1991. Inflation isn't necessarily the prime focus of the Fed so the PPI numbers had little effect on the Dollar. Sterling climbed to above 1.96 against the Dollar.

After a quiet start to the week, the UK picks up the pace with the minutes from thelast MPC meeting. The decision of the meeting was to keep rates on hold, and they would have had a sneak peak at the high CPI figure which was released shortly afterwards, so the minutes will be interesting to see how the members reacted to the sharp jump in inflation, and are likely to give the Pound support, particularly if the committed dove Blanchflower voted for a no change.

We also get the figures from the German IFO survey, seen as a more reliable indicator than the ZEW index released yesterday.  If it follows the same pattern as the ZEW index then the build up of negative expectations could start to weigh on the Euro, but with the Euro interest rates sticking where they are, then the single currency is unlikely to fall far.
Later in the day, after UK trading hours, we get the minutes from the last FOMC meeting. This is likely to further confirm the end of the rate easing cycle, and although it will probably not give the Dollar a boost, it may stop it falling much further.

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

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