Currency Update – Monday

Currency Update – Monday

Last week was dominated by rate decisions in the US, Australia, the Eurozone, and the UK. All kept rates on hold, but where the decisions and statements indicate the future direction of interest rates will go varies with each economy. Australia started the week and their statement was more dovish than many expected, leading to expectations of a number of near term rate cuts, next came the US with a broadly neutral statement, and the outlook for US rates are mixed; whereas some think that more rate cuts could be on the cards, the stressing of inflationary risks by the Fed make this unlikely. Next up was the MPC who didn't release any statement so we will have to wait for next week's minutes to get any insight into their thinking. Last but certainly not least was the ECB decision, as usual they held a press conference after the announcement in which Trichet, stated that Eurozone growth was likely to be less than expected over the coming year, which spooked the markets sending the Euro lower.

Sentiment over the Dollar has been slowly shifting for a while, and early last week saw creeping Dollar strength, but it was after the ECB's decision that the dollar really jumped higher. Many in the market seem surprised that a slowdown that was caused by the housing market in the US, has contaminated so many other economies, it seems the decoupling view (the idea that due to rapid growth in the developing nations the world was less dependent upon the US economy) that was prevalent in some areas, has been found to be less than absolute. With the general view that the US is well placed to grow out of it's recent downturn, and as it was first into the dip, it is also likely to be first out, the sentiment over the Dollar has reversed.

The outcome from last weeks decisions was the bring the Pound down 5c against the Dollar to below 1.92, bring the Euro down to below 1.50, and to also weaken the Australian Dollar, which has fallen 4c against the Pound, and the US Dollar.

Some of last weeks dramatic moves have been mitigated this morning, as many traders take some profit on the large moves. Sterling has jumped a back over 1.92 against the Dollar as surprise news from the producer price index showed manufacturing costs actually falling, although factory gate prices are still rising at a worrying rate. Inflation will be at the forefront of the UK's mind this week, as tomorrow we get the CPI figures, and on Wednesday we get the BoE's quarterly inflation report.

There has also been some profit taking elsewhere with Sterling falling below 1.28 against the Euro, and the Dollar climbing back above the 1.50 level. The view that the US is well placed to accelerate out of it's downturn will be tested this week as the US CPI figures are released and we get retail sales figures this Wednesday.

Michael Corcoran | Treasury Solutions | nabCapital

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