Euro recovers, sterling falls after renewed eu confidence

Sterling range traded against the Dollar but fell versus the Euro ahead of the release of the Bank of England MPC minutes last week. The Bank of England minutes took on a distinctively dovish tone as the members voted 7-2 for no Change to interest rates and 8-1 on keeping the value of the £200bln asset purchase scheme unchanged. The decisions were as markets had expected but what weighed heavily on the Pound was the fact that more of the MPC members seemed to suggest additional stimulus rather than monetary tightening may be required this year.

The Euro recovered some of its composure this week as risk aversion eased after the Greek government survived a ‘no confidence’ vote on Wednesday. An added support factor for the single currency was uncertainty and the expectations of a continue dovish stance on policy from the US Federal Reserve Bank. Greek debt concerns remained an underlying theme last week as confirmation of a bailout wasn’t forthcoming from European leaders and ultimately combined with slightly weaker German economic fundamentals to pull the Euro to its a weekly low versus the Dollar as the weak closed.

The Dollar struggled with profit-taking early last week after having pushed higher for some time due to sovereign debt concerns for Europe and analysts expected the Fed to strike a cautious note on the US recovery after its interest rate decision last Tuesday. The Federal Reserve Bank kept interest rates unchanged at 0-0.25% as expected but surprised markets by being more hawkish regarding stimulus as the support needed by the US economy. The Fed Change in policy stance and stronger USD final Q1 GDP figures lifted the Dollar and despite some weakness prompted by a drop in oil prices late in the week the Dollar closed near its weekly highs.

This week

The Pound will have plenty of data to trade from this week as markets focus on the final release of UK Q1 GDP figures. The numbers are not expected to be revised from 0.5% and in the context of last week’s dovish Bank of England minutes this data is not likely to inspire investors to buy into the Pound, weak growth levels were highlighted as an underlying cause of the Change in policy expectations and the consideration of further economic stimulus. 

European Leaders have given the Greek government and opposition parties an ‘ultimatum’ to pass proposed austerity measures and move forward bailout negotiations but the longer the process goes on the greater the negative impact this will have to confidence in the Euro. German economic data will certainly be closely watch and with CPI inflation and retail sales data scheduled to be released this week there will be plenty to hold traders attention.

The Dollar has seen strong upward trends that are not expected to be reversed quickly as confidence in Europe remains uncertain and the Federal Reserve Bank has announced the end of its second round of quantitative easing. The impact of commodity process will likely be less of an issue as oil prices have stabilised following last week’s announcement of 60mil barrels being released from US oil reserves. 

Source: Baydonhill FX