Currency Update

Currency Update

The US Fed gave the markets what they expected with a further 25bp cut down to 2%, but the expected announcement of a pause in the rate cutting didn't happen. The Fed did drop some of their more Dovish statements, but still said that 'economic activity remains weak', pointed to the financial crisis hurting economic activity over the coming quarters, and also said that 'readings on core inflation have improved somewhat'. The markets expected a sign that the Fed's rate cutting was finished, and the fact that it didn't come has hurt the Dollar as traders, reversed their Dollar buying behaviour. With the Fed seemingly still balanced on the possibility of further rate cuts, upcoming economic data takes on even more importance, and all eyes will be on tomorrow's non-farm payrolls to see whether the labour market is still on a downward course.

The Pound has climbed up towards 1.99 against the Dollar on the back of the Fed's balanced statement, also helped by comments form the BoE that the worse of the credit crunch is behind us. Although this may be true in terms of the announcements of write downs and the revaluation of mortgage backed assets, there is still a lack of liquidity in the money markets, and the interbank lending rates are still significantly higher than the bank of England's base rate; something that the government has mentioned, complaining that the banks are being far too cautious with their funds and should ease their monetary views. However banks have the duty to their shareholders not the government, or the economy at large, and although the BoE are taking steps to inject some liquidity into the market, it will take time for trust to return, and we may never see the loose monetary conditions that where enjoyed up to last year.

The Pound has climbed even further against the Euro touching 1.28 on this morning as there are further signs that the Eurozone economy may be coming into line and allowing the ECB to cut rates. We had CPI inflation yesterday, which was expected to ease, in line with some earlier partial results from individual economies making up the greater European whole, and didn't disappoint as Eurozone inflation fell to 3.3%, from 3.6% in march. The Euro economy now seems to be feeling the effects of the slowdown in both the US and to a lesser extent the UK, so it may be that the pressure on the ECB to cut rates will only increase, however inflation will have to continue to fall before the ECB will even consider it.  

There is some downside risks to Sterling today in the form of the PMI Manufacturing data, which is likely to see a fall from previous months, but the focus will be firmly on the US for the rest of the week, with their own manufacturing data, personal spending numbers, and the PCE deflator release, ahead of tomorrow's non-farm payrolls. The batch of data is likely to show a slight decline in line with the view of a slowing economy, but any shockingly bad numbers could raise the prospect of further rate cuts and weaken the Dollar.

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