The pound briefly touched 1.19 against the euro yesterday afternoon for the first time since 20 January as speculation mounted that the Bank of England’s Monetary Policy Committee (MPC) may be on the verge of a sooner than expected increase in UK interest rates to combat rising inflation levels.
The British Chambers of Commerce disagree and have urged the MPC to keep its key interest rate on hold this week as the UK recovery remains “fragile,” in their opinion.
Ernst and Young’s Item club predict good things for the country’s exporters, fuelled by growth in the middle classes in emerging countries like Brazil, Russia, India and China (BRIC). Just 5% of British exports currently find their way to BRIC nations, but ITEM forecasts annual growth of almost 12% until 2020.
With Federal Reserve Chairman Ben Bernanke due to testify on the US economy before the House Budget Committee on Wednesday, the markets are waiting to see for any change in policy as to date the Fed has shown little sign of concern over recent inflation trends and its soft policy stance has being weighing on the dollar. Overall, a quieter week for data may see the dollar trade within a much narrower range after the volatility seen in the last few weeks.
Sovereign debt issues remain very much to the fore for the euro after EU leaders set a 25 March deadline to agree an overhaul of the euro zone’s €440 billion bailout fund. The measures may include stiffer sanctions against budget deficits higher than 3% of GDP, lower interest rates on loans and allowing the European Financial Stability Fund (EFSF) to buy debt directly from member states.
Euro skeptics remain unconvinced, pointing to a Bloomberg survey which showed investors predicting that at least one nation will leave the euro within five years and that Greece and Ireland will default. Euro optimists, on the other hand, are increasing wagers that the euro will rise to the highest level since October as German Chancellor Merkel said at the end of last week’s meeting that there was “broad consensus” on reaching an accord.
The euro fell to a two week low against the dollar yesterday after weaker than expected German factory orders. The results raised concern about the economic recovery and reduced expectations of an interest rate increase in the euro zone any time soon. Debt ratings agency Moody’s issued a downbeat report on Italian banks.
The Australian dollar was steady on Monday as strong data on job adverts helped offset subdued retail numbers. Surging commodities prices also helped the dollar with copper soaring to a record high on Monday and iron ore, the nation’s top export, holding near a record.
Despite damaging natural disasters in Queensland, Victoria and western Australia and soft retail spending, the Australian economy still displays a favourable domestic outlook.
The pound has reached an 11 month high against the South African Rand as profit taking has hit gold prices and the markets continue to sway between risk aversion and risk appetite with no clear direction.
Commentary by Tony Redondo
“Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.”
