Pound falls, euro holds value as interest rate decisions postponed

A shortened trading week in the United Kingdom as well as the main focus for analysts being on the Bank of England and European Central Bank rate decisions gave rise to range trading dominating the market for the early part of last week.

The Pound fell across the board on Tuesday before settling into the weeks ranges after the release of weaker UK PMI manufacturing data. The main concern for markets is the stability of economic growth in Britain and how this impacts the Bank of England’s ability to manage inflationary pressures. The PMI manufacturing index fell to 54.6 from 56.7 which was a downwardly revised figure and triggered a selloff in Sterling due to the negative impact the figures had on interest rate hike expectations. Market are now speculating that the BoE may move back to a more dovish position and thus hold interest rate until early next year, although these expectations are frequently revised the impact on the Pound is obvious, the market sold Sterling. Market expectations were reaffirmed by later releases of construction and services PMI that weakened as well. The monetary policy decision from the Bank of England offered no surprises with interest rates of 0.50% and the £200bln asset purchase program both remaining unchanged.

The Euro saw little movement ahead of the ECB’s rate decision on Thursday as traders we focused on future interest rate expectations and divided on whether the next move higher by the ECB would come in June or July, this kept markets somewhat reluctant to take any positions ahead of the policy announcement. The European Central Bank kept interests on hold at 1.25% as expected but a shift in tone from ECB President Trichet during the post decision press conference where he took a less hawkish stance weighed heavily on the single currency. Trichet did not use any of the traditional ‘code words’ market have come to expect to signal further rate hikes rather opting for stating the Governing council would ‘monitor very closely’ developments in inflation. The result is an expectation amongst analysts that no rate hike will occur in June and that July is now more likely.

The Dollar had a number of influencing factors last week in the form of a broad-based commodity selloff and weakness in the Pound and the Euro due to changes in interest rate expectations. Silver has in recent months been pushed higher for the same reasons as gold; geo-political tensions, global economic uncertainty and the unprecedented cash injections by the Fed but the commodities movements have been far more exaggerated making it more attractive to speculators who took Silver sharply lower this week and triggered a knock-on effect slide in gold and oil, thus aiding Dollar gains. The ECB’s pause on interest rate hikes created Euro weakness that aided the Dollar further but US fundamentals in the jobs market came out to the downside putting the brakes on the Greenback trend higher until the release of stronger Non-farm payrolls figures. The data came out at 244K from the previous 216K that gave rise to initial Dollar strength but expectations remained that ultra-loose monetary policy from the Fed would continue which capped any gains made. 

Source: Baydonhill FX