Currency Update – Tuesday 5th May

The last two trading days have been subdued due to bank holidays in Europe on Friday, and a typically grey bank holiday Monday in the UK. During this time the data has continued the general theme of recovery, with a rise in Chinese manufacturing, better than expected UK and Eurozone PMI figures, as well as higher readings in regional consumer confidence and manufacturing in the US. Throw in better than expected pending home sales, and the first rise in US construction in six months, then the optimists view that we may be nearing the nadir of the recession seems to be confirmed. However there have been some less optimistic traders worried over the results of the Fed’s stress tests on US banks which is getting announced on Thursday, and this Friday’s non-farm payrolls could also provide a negative shock to those who are seeing green shoots of recovery.

Until the end of the week, it looks like the markets will be supportive of Sterling, which has benefitted from the optimistic tone, rising above 1.50 against the Dollar, and up above 1.12 against the Euro. The Euro itself has risen against the Dollar, climbing up towards 1.34, as traders seek higher returns outside of the US safe haven. The Euro has stayed buoyant against the Dollar, in spite of poor economic performance in the Eurozone, but this period of Euro strength could soon be coming to an end is the ECB do announce a move towards QE measures this Thursday. They are expected to cut rates by another 25bp to 1%, but the markets are also expecting some further hint at the ECB’s willingness to consider other measures. It is highly unlikely that the ECB will announce a serious program of monetary expansion as the UK and the US have, but they are likely to go with the halfway house of buying corporate bonds, like the US and the UK did; even this may be enough to tip the scales against the single currency.

The ECB aren’t the only bank with a rate announcement this week, the BoE’s MPC meet earlier on Thursday, although they will leave rates as they are, while last night the RBA also left rates alone, leaving the Aussie Dollar base rate at 3%. The increased optimism has benefitted the Aussie Dollar, through increased prices for it’s commodity exports, as well as an economy which has weathered the financial storm better than most. The rate cuts may not be over though, at 3%, they are still one of the highest in the developed world, and there could be a further 100bp of cuts to come, maybe later in the year. Until then the Aussie Dollar is staying strong, holding down near 2.03 against the Pound, and above 0.74 against the Dollar.

With the big economic events weighted towards the back end of this short week, we do still have a few releases to get our teeth into today, with UK PMI for construction, Eurozone producer price index, and US consumer confidence reports all released. The general tone is likely to be in line with the current zeitgeist, small recovery or at least a slower pace of decline, which will keep the Pound buoyant until later in the week.