Sterling continued it's rally against the Euro yesterday, but found the 1.10 level a barrier, which it did briefly cross overnight, but has fallen back below before this morning's trading. The Euro has been weakening as the first estimate of Eurozone CPI showed inflation falling further than many expected, down to 1.6% from 2.1%, which has reinforced the fears of the ECB vice president that the Euro may slip into deflation. The fall in Eurozone inflation has fuelled speculation that the ECB will cut rates next week, which had the effect of not only weakening the Euro against the Pound, but also causing it to fall to almost 1.34 against the Dollar, before recovering slightly.
It is perhaps a sign of the lack of direction in the markets that a proposed rate cut by the ECB weakens the Euro, while a rate cut by the MPC is expected to help UK growth, giving Sterling a boost. The Pound has rallied against the Dollar as Pending home sales in the US dropped by far more than expected, 4% compared to forecasts of 1%, plus comments from Obama that there will be a somewhere similar to the current $1 trillion deficit 'for years to come' weakened the US currency. Overnight the Pound almost hit 1.50 against the Dollar, before falling back on this morning's trading to sit around 1.4850.
Sterling has rallied in spite of weak economic data, just today the British institution that is M&S reported their worst trading figures in a decade and look likely to shed about 1,000 jobs, and this pattern of improving markets even as economic data shows a weak economy is reflected elsewhere as the markets price in better times to come, mostly due to massive government intervention. The improving risk appetite can be seen in climbing stock markets, as well as rising commodity prices. Copper has risen 20% since Christmas, Oil is on the up, although still at low levels compared to last year, and the price of gas has also gone up, although this is heavily influenced by Russia and Ukraine redefining the term cold war. The Australian central bank may have started cutting rates quickly, but the currency is still one of the highest yielding, and as risk appetite returns, and commodity prices rise, the Aussie dollar has benefited. It has risen to above 0.72 against the Dollar, and has forced the Pound down to around 2.05, a long way down after Sterling hit heights of over 2.60 against the Australian Dollar in October.
The data calendar today is relatively light, with just Eurozone producer price index and UK BRC shop price index for December released, both are expected to show price falls, opening the way for rate cuts in the Eurozone next week, and the MPC tomorrow. This is likely to continue the trend of weakening the Euro, and giving the Pound a boost, although with central bank's decisions not as certain as they have been in previous times of stability, the markets may wait to the actual rate decision before reacting.
Michael Corcoran - Assistant Manager |Treasury Solutions