FX Market Overview

Having seen UK inflation push above the Bank of England’s target range of 1 to 3 percent, the BOE will be right back in the spotlight today. At 3.5 percent, the UK Consumer Price Index is well above the BoE central target of 2 percent and that prompted a need for the Governor of the BoE to write to Alistair Darling to explain their failings. However, he does have the excuse of VAT rising back to the 17.5 percent level and of higher energy prices.
Today’s release of the minutes from the last BoE meeting will be firmly in the limelight though as everyone searches for the Monetary Policy Committee’s rationale in leaving the base interest rate on hold at 0.5 percent and stopping the cash expansion program known as Quantitative Easing. In his letter to the Chancellor, Mr King expressed his view that the surge in inflation will ebb away this year and that we will be back in range before 2010 is over. The minutes released this morning will give some indication of whether that is a view held by the whole MPC or just a few. A 6-3 vote to leave interest rates on hold is the general forecast. It will be intriguing to see whether that is right and just what the other 3 members wanted.

In the meantime, there is a mood that an agreement can be reached within the EU on the matter of what to do about Greece. Because Greece is currently sitting on the naughty step and has had its vote removed for the forthcoming meeting; the rest of the EU finance ministers have given Greece a deadline of March 16th to impose more stringent fiscal measure of see them imposed by the EU authorities themselves. Jean-Claude Juncker, who is head of the Eurogroup, suggested that EU ministers have already reached an agreement on a support package and it was these kinds of comments that allayed some market fears. The Euro had a rather better day than of late and made gains against the Pound, US Dollar and most other currencies.
Sterling slipped through the day as a report from a well respected trading house suggested that the UK had joined the PIGS (Portugal, Ireland, Greece and Spain) in being vulnerable due to the UK’s immense government debt levels. That comes a few days after the same sort of thing was said by one of the Credit Ratings agencies, Fitch, and doesn’t do the UK government any favours as they try to plan their way out of the depths of debt despair. I know that using the terms ‘Government’ and ‘Plan’ in the same sentence makes it an automatic oxymoron but you have to give them the benefit of the doubt don’t you?
The US Dollar lost some ground as the emergence of a more positive EU tone unleashed risk demand and the safe haven US Dollar was sold as a result. That in spite of or perhaps partly because of the improvement in the Empire State manufacturing sentiment index. US inflation data due on Friday may have an effect on that.
The Australasian Dollars both strengthened through the day as funds flowing from the USD find their way into the high yielding Australian and New Zealand Dollars. The Canadian Dollar also made further gains, briefly pushing the beleaguered Pound down to its lowest level since October 2009.
After this morning’s BoE minutes, traders will switch their attention to the US from whence, Housing market, import price data and industrial production numbers will come. And the day is capped off by the release of the Federal Reserve’s meeting minutes which are alasy worth a read for signs of Fed sentiment.
And finally, I would guess the nation was split last night, the dilemma was immense, do you watch the Brit Awards ceremony; lots of overpaid pampered people winning awards and thanking all their pamperers or Football; lots of overpaid pampered people kicking a ball and swearing at the referee? Phew, it’s so hard to decide. Book and bed then? Sounds good to me.

Currency - GBP / Australian Dollar

The Reserve Bank of Australia left its base interest rate on hold when they last met. Since then, Aussie unemployment has improved markedly and we have also had positive Australian housing data to strengthen the Australian Dollar. On Monday night, the RBA released the minutes of their last meeting and the insight was that they knew the markets, which had unanimously forecast another interest rate hike, would react badly to the RBA’s decision but they felt that they needed some time to assess the effects of past hikes before embarking on further credit market tightening. The markets’ initial reactions was to sell the Australian Dollar but most traders soon came to the conclusion that Australian data is such that another hike is a foregone conclusion and that as long as China continues to grow in spite of its economy calming measures, the Australian economy will continue to out-perform currencies from the other G10 nations. Consequently, the Australian Dollar is pushing lower against the Pound and the spikes of recent weeks are sinking into the distant memory. One of two things will happen at A$ 1.75. Either we will see a break back into the downtrend that controlled this exchange rate for the last few years or we will see a bounce and significant Sterling gains in the weeks ahead. However, for the latter to happen, Sterling will have to be seen in a more favourable light and with an election in the offing and serious debt hanging over the government like a grey mist, the Pound may struggle to make any kind of gains.