YB Currency Update – Monday 22nd February

The markets have continued to be shaped by Thursday’s surprise move by the Fed to raise the discount rate to 0.75%. The immediate reaction after the event was panic, which is probably why the Fed waited until US markets were closed on Thursday to announce the change, of course this didn’t help the Asian or European markets, but by the time the sunlight rolled around the globe back to the US, the Fed had managed to make some soothing noises to try and calm the markets. A number of Fed members have come out to explain that fears that the rise in the discount rate meant earlier than expected base rate rises were overblown, and they were at pains to explain that the move was a normalisation of policy and not a step in a tightening cycle. The markets still raised the their forecasts for US interest rates and this initially gave the Dollar a strong boost, although some of it’s gains were eroded on Friday with the Euro managing to push up from below 1.35 to around 1.36.

The Pound bucked the general trend, and failed to recover much of it’s losses on Friday as surprisingly weak retail figures kept Sterling soft. The recording of the figures has changed over the new year making comparisons slightly problematic, however the headline figure is still -1.8%, when -0.5% was expected, although if you strip out fuel, which was added to the measure last month, then the headline figure becomes a better, but still weak, -1.2%. The detail of the figures go some way to softening the numbers, with a drop in food sales doing the nations waistlines no harm, but revisions to previous months provide the biggest boon, with the new figures pointing to an increase in GDP figures not just for Q4 2010, but also possibly Q3. Of course the markets are more concerned with what will happen rather than what just has happened, and January’s weak sales can be blamed on bad weather and tax increases, so it may not bode so badly for the coming months, although VAT is going to stay at 17.5% and yesterday, in the North,  we got a new layer of snow on the ground. The Pound has stayed steady around 1.55 against the Dollar over the weekend.

Weekends seem to be the time for bailouts, possibly due to the absence of the grinding pressure of the markets, and there were rumours this weekend that a deal was being hammered out to guarantee Greek debt, and provide some direct lending, to allow the Greek government some space to enact it’s austerity measures and show the markets that it means business. The German government have been said to be willing to provide 20% of the guarantee, and this seems to have allowed the Euro to firm up a bit, and has brought the GBP/EUR rate down to around 1.1350.

It’s a slow start of the week for UK data, with Friday’s revision to GDP data the highlight. There’s not much data out elsewhere today either so the markets will have plenty of time to mull over the Greek bailout rumours, and what the raising of the US discount rate means, in the meantime the Pound is likely to stay rangebound around current levels.