Currency Update – Friday

Both the ECB and the MPC delivered the decisions as expected, both keeping their rates on hold at 4.25% and 5% respectively. As usual the BoE released no details so we will have to wait for the minutes to get some insight into their thinking, however with the recent announcements of utility bill rises likely to fuel inflation even further, it is likely to be the same 3 way split between a hawk or two, a majority who are willing to wait and see, and Blanchflower who seems determined to vote for a cut no matter what.

The ECB held their usual press conference, in which Trichet seemed much less Dovish on rates than many expected, this would normally have given the Euro some support, however Trichet also stated that they thought that economic growth was likely to be much weaker than previously forecast, and it seems that it is this what the market has reacted to, with the Euro tumbling and the Dollar taking advantage. The sentiment on the Dollar has shifted over the last few weeks and this week has seen it make some significant gains, but it was Trichet’s comments which have really fuelled a charge, sending The EURUSD rate down below 1.52 and the GBPUSD below 1.93.

The radical shift in sentiment has also helped the Pound climb above 1.27 against the Euro, and this is in spite of some bad news out of the UK banking industry with RBS announcing a huge write down of assets (£5.9bn), and announcing it’s first ever loss, of £691m, compared to £5bn profit a year ago. It is perhaps a sign of the direction of the sentiment on the UK financial industry that these results were actually better than expected, and unlike previously the bad news from the financial sector has not hurt the Pound.

There is no significant data out for the UK or the Euro today, so all eyes will be on the US to see just how far the USD rally can continue. We have Q2 non farm productivity and June wholesale inventories, the latter measure has a direct bearing on Q2 GDP, and if the markets optimistic expectations of a 0.6% increase are not met, it could signal a halt in the Dollar’s strong rally.

Michael Corcoran – Assistant Manager |Treasury Solutions | nabCapital