Currency Update – Tuesday 16th March

Currency Update – Tuesday 16th March

It's one step forward, one step back at the moment for the Pound, as any small rally seems to be taken by the markets as an excuse to sell Sterling. Yesterday's slide from 1.52 to 1.50 against the Dollar has left many perplexed with various reports blaming: opinion polls, comments by Moodys rating agency, comments made by a MPC member, and a fall in global risk appetite. The opinion polls do still make a hung parliament seem a possibility, but the latest polls actually show the Conservatives with a larger lead than this time last week, so this shouldn't have a negative effect. The comments by Moodys were nuanced enough for some to latch onto the news that the UK's position had moved 'substantially' closer to losing it's rating, while others sought comfort in the comments that 'the UK is still a long way away from anything that could prompt a ratings downgrade. The comments by MPC member Barker, that UK GDP may fall in the near term, is hardly news, but will not have helped the Pound, as either will the continuing fears of further tightening in China, and even India who may be raising interest rates soon to fight their 9.9% inflation.

Although the barrage of data and comments above could be argued to be Sterling negative, they are all fairly weak drivers, and it appears that the sentiment against the Pound still seems strong, with the markets not needing much encouragement to start selling. The Pound has found some resistance just under 1.50 against the Dollar and is currently hovering about half a cent above this level. The US industrial production figures came out slightly stronger than expected, but still only at 0.1% rise, with the bad weather depressing activity. The subdued industrial figures also play into a scenario that some feared, as the large GDP figures from the last quarter seemed to be boosted by suppliers boosting their inventories, and once these inventories are full then demand will drop off, which may be what has happened.

The EC is rumoured to have agreed framework to rescue problematic states, although no details have been released. There has been a leak out of the EC of a report which may be out tomorrow, criticising the UK's deficit reduction program, which the government say will reduce the deficit to around 4.7% by 2015. Although the UK is not part of the Eurozone it has still agreed, by becoming a member of the EU, to keep it's deficit to around 3%, something the government has spectacularly failed to do. Of course many other nations are also struggling with this target deficit, not least the PIGS countries (Portugal, Ireland, Greece, and Spain), and this could be why the Pound has stayed relatively steady against the Euro, continuing to hover in a range around 1.10. The criticism of the UK deficit plans seems to have more of a political fallout than an economic one.

The big event of today will be the Fed rate decision, announced this evening, with the statement expected to include monetary tightening as well as some indication when rates may be rise. Before that Eurozone CPI and German ZEW index will be released. CPI is expected to stay low, while the German ZEW Index is expected to come in roughly in line with last month.

As the high GDP growth for the US was based on restocking, which may point to a moderation in future growth, the US Fed are unlikely to want to shock the markets, so they are probably not going to announce any plans to change rates anytime soon, although they may juggle some of the more technical liquidity measures. If the Fed do move to reassure the markets then the Pound is likely to rise, although it may face more resistance around 1.52 against the Dollar.

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