A volatile session yesterday saw the pound fall against the US dollar but gain against the Australian dollar on the risk aversion theme ahead of today’s interest rate announcements from the Bank of England (BoE) and European Central Bank (ECB).
Neither the BoE or the ECB are expected to signal any change today but analysts will be paying attention when ECB President Jean Claude Trichet holds his press conference this afternoon. Any mention of ‘strong vigilance’ to rising prices will be taken as a strong signal to the markets that the ECB may well raise rates by another 0.25% as early as next month.
Meanwhile, the US dollar benefited from the rush towards safe haven assets amid concern about a global slowdown and lingering uncertainty about Greece’s debt plan.
The widely watched Beige Book confirmed that US growth had slowed in at least four districts. While the Federal Reserve does not expect a double-dip recession in the US, it did acknowledge a slowdown in manufacturing expansion and noted the effects of Japan’s recent earthquake disaster on the supply chain.
The pound bounced back against the euro in the afternoon on the risk aversion theme after earlier losses due to a warning from ratings agency Moody’s that a failure to meet UK government fiscal targets could prompt the ratings agency to strip the UK of its AAA rating.
Moody’s says the outlook on the UK remains stable but was quoted by Reuters as saying : “As we’ve been saying for a while, in a situation of lower growth combined with weaker than expected fiscal consolidation, we would reconsider our stance.”
Overnight, the New Zealand Reserve Bank followed their counterparts in Australia earlier this week in keeping rates unchanged but warned that fast economic growth and inflation could prompt a rethink in the short term. Both the Australian and New Zealand dollars have performed well this year on the back of surging commodity exports to the fast growing Far East economies.
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.”
