The pound fell heavily in the markets yesterday following the release of further poor data and a strong hint from the European Central Bank (ECB) of a possible interest rate hike in the euro zone as early as April.
In the UK, the Halifax reported that February saw a resumption of the downward trend in UK house prices with prices in February 2.8% lower than a year ago.
The Incomes Data Services reported that UK wages, one of the main measures the Bank of England monitors in assessing interest rate levels, picked up strongly at the start of 2011. However, the key services sector showed a marked slowdown in February adding to the already sharp divide within the Bank of England (BoE) as to whether to focus on rising inflation levels (and therefore increase interest rates which would support the pound) or instead continue to focus on the economic recovery (and thereby keep interest rates at their historic low and/or keep up with the bond buying Quantitative Easing program which would deflate the pound).
The pound’s fall was at its sharpest against the Euro on the news that euro zone interest rates could rise next month.
The US dollar also suffered, falling to a 4 month low against the Euro.
Although the ECB kept euro zone interest rates unchanged at 1% at their monthly meeting yesterday, ECB president Jean-Claude Trichet told reporters an “increase of interest rates in the next meeting is possible”.
Trichet’s hawkishness and repeated reference to “strong vigilance” pushed the euro higher.
There was also some caution ahead of today’s US monthly jobs report which is expected to reveal employment in February at its highest since May last year.
The New Zealand dollar continued to suffer after the New Zealand Prime Minister strongly hinted that he would like to see the New Zealand Reserve Bank (NZRB) cut interest rates at their next meeting, due next week to aid the economic recovery in the country following the Christchurch earthquake.
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.”
