Governor King said yesterday the UK economy is not yet back to health and needs the support of low interest rates. Bank of England officials are preparing for a decision next week on whether to extend their QE program to lift the economy from its first double-dip recession since 1975.On the political front Labour party made sweeping gains in a grim night for the coalition in local elections. Labour gained 461 seats and 21 councils, the Conservatives are down around 278 seats. As we experienced during the hung parliament, political uncertainty is not good for sterling.
Disappointing UK Services PMI released early yesterday morning weighed heavily on sterling for the day’s trading and halted the steady progress from recent sessions.
GBPEUR closed a shade below its next significant target of 1.2315 yesterday, hitting a high of 1.2338 and a low of 1.2277 during the ECB press conference. GBPEUR has strong technical support above 1.2211. This morning markets have opened around 1.2305, a repeat of last month’s poor European Retail Sales data today could push sterling to a new high.
There was little change on GBPUSD yesterday with just a 55 pip range from the day high and low at 1.6215 and 1.6160. Markets have opened this morning at around 1.6180 and analysts are expecting a bearish resumption over the coming weeks as sterling has somehow managed to maintain a strong position versus the US dollar despite the recent poor UK economic data.
German and European Services PMI both fell short of forecast this morning. The German Services sector still held on to its positive outlook with a figure of 52.2, however the outlook in Europe has dropped now to 46.9 from 47.9 in February.
Mario Draghi surprised the currency market by assuming a defiantly hawkish posture at the ECB press conference yesterday dismissing any speculation of an imminent rate cut or even an additional LTRO. The EURUSD responded by moving from 1.3096 to 1.3176 and GBPEUR fell from 1.2338 to 1.2277.
Despite confirming the economic slowdown that is starting to affect the stronger economies of France and Germany, Draghi remained upbeat about a return to growth in the Eurozone in second half of this year. Draghi appealed for patience noting that more time was needed for the LTRO to filter its way through the European monetary system.
This Sunday will see parliamentary elections in Greece and presidential elections in France. Markets will be particularly eager to see the results in France, with favourite Francois Hollande expected to take over from Sarkozy this has largely been viewed as having a negative impact on money markets.
Service Industries in the US expanded less than projected and consumer confidence weakened, signalling the world’s largest economy may be cooling. Risk appetite fell as a result with the S & P 500 falling nearly 1% after the data. The two sets of labour data due this afternoon will be critical to risk appetite and the near term trends for US dollar.
The Swiss Real Retail sales Figure Year-on-Year came in this morning at 4.2%, much higher than the expected 1.1% and a big increase from the previous figure of 0.8%. Generally, an increase in this figure is good for the currency although we have seen little change in the GBPCHF this morning.
The Reserve Bank of Australia lowered its growth and inflation forecasts in its Monetary Policy statement Friday but the Aussie dollar’s reaction was muted, with GBPAUD currently residing at 1.5770.
GBPNZD rose to its highest level in more than four months after a report yesterday showed the New Zealand jobless rate unexpectedly rose. GBPNZD traded as high as 2.0233 overnight.