The pound only fell fractionally against the euro and US dollar in a quieter day on the fx markets but continues its general downward trajectory.
The Office for National Statistics (ONS) reported that the UK economy shrank by 0.5% in the fourth and last quarter of 2010, slightly less than the previous estimate of 0.6%. The contraction was made worse by the wintery weather that hit much of the country towards the end of the year but the ONS confirmed that UK economic growth is ‘sluggish’.
Meanwhile, the Bank of England reported that UK consumers took on more debt in February with an increase in mortgage and unsecured borrowing.
With economic data beginning to show the affects of the government’s austerity measures and analysts predicting no short term move in UK interest rates, the pound has been left in ‘no man’s land’ neither appealing to investors on economic fundamentals nor on sentiment.
Contrast with the euro which continues to make gains despite another credit downgrading of Greece and Portugal by ratings agency Standard & Poor’s. The downgrades leave Portugal one notch above junk rating and Greece with a creditworthiness below that of Egypt!
Underpinning the rise in the value of the euro is the expectation of an early rise in euro zone interest rates with European Central Bank President Jean-Claude Trichet repeating only yesterday that euro zone interest rates could rise as early as April.
The US dollar strengthened against the pound but was marginally down against the euro. Data out yesterday showed that US single family home prices fell for the seventh month in a row in January with prices in four cities at their lowest for 11 years. Meanwhile, U.S. consumer confidence fell in March after hitting a 3 year high in February as expectations about jobs and income growth worsened. Despite the poor data, the dollar gained against most major currencies apart from the euro on Tuesday on increasing hopes that the Federal Reserve are looking to wind down their $600 billion quantitative easing program.
The Australian dollar rose to a 29 year high against the US dollar as demand for the country’s commodities shows no sign of a slowdown. Underpinning its rise are its high interest rates which help it to benefit from the ‘carry trade’, relatively low inflation and strong economic growth. The Australian economy grew by 2.7% in 2010 and analysts say it could grow at an even faster pace this year.
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.”
