April Currency Update
After a vaguely promising start to March the pound gave up the ghost. On the first day of the month sterling had a peek above €1.18 and evidently took fright at what it saw. From there on it its downward journey was reminiscent of Winnie the Pooh in the hands of Christopher Robin, coming downstairs bump, bump, bump, on the back of its head. As the end of the month approached it had bumped its way down nearly five cents – four per cent – and was looking a little stunned by the experience.
As it had been the previous month, the main reason for sterling’s decline and the euro’s ascent was the divergent outlook for the two currencies’ interest rates. Already by the end of February two senior bods at the European Central Bank had warned that the governing council would increase its 1.0% refinancing rate if inflation threatened to rise further. ECB president Jean-Claude Trichet upped the ante at his press conference early in March when he spoke of “strong vigilance” on inflation. That has traditionally been the coded warning for an imminent rate increase. But lest there be any doubt, M Trichet went on to say that an April move was “possible”. That he volunteered that comment was enough to persuade investors that the ECB really will lift the refinancing rate to 1.25% on 7 April. Now, after a month to get used to the idea, many have made the additional leap to assume more increases will follow before the end of the year.
Opinion about the sterling rate outlook has been veering the other way. Not so long ago it was almost a foregone conclusion that by May the “hawk” faction in the Monetary Policy Committee would have grown to the five members necessary to force an increase. That confidence has since evaporated. Although a hard core of three members votes consistently for higher rates the governor and his five loyal doves remain adamant that a rate increase would be no more than a futile gesture. It would do nothing to alter January’s VAT increase and it would not bring down the price of oil. Once those factors drop out of the equation in 2011 inflation – which could go as high as 5% this year – will return naturally to its 2% target level.
Perhaps surprisingly, political and financial problems in Portugal, bank problems in Spain and Ireland and the failure of EU leaders to finalise plans for the permanent financial stability fund have not dampened investors’ appetite for the euro. It has not just been buoyant against the pound; over the course of January it advanced by nearly three per cent against the US dollar too. With the US dollar out of favour and G7 central banks intervening to hold down the value of the yen nervous investors have precious few options if they feel the need to put their cash into a safe-haven currency. Apart from the Swiss franc there is nothing else around so the euro seems to have been partially fulfilling that function.
The first Thursday of April will be important for the sterling/euro relationship, with both the Bank of England and the ECB announcing their monetary policy decisions. Whilst there is only the remotest possibility of a tightening move by the Bank of England, the ECB has as good as promised that it will take interest rates higher. Critical to the euro’s fortunes will be what the ECB president has to say at his press conference. If he were to emphasise that the increase is a one-off, and not the first of a series, the euro would lose some of its gloss. If he confirms market expectations of further moves this year the euro will be off to the races.
Tags: euro and pound rates, exchange rates, french currency update, pril currency update
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Wednesday, March 30th, 2011 at
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