Markets show surprising degree of disappointment to yesterday’s unchanged voting pattern

Publication date: 24 March 2011
Author: Duncan Higgins, CaxtonFX

Sterling suffered a decline against all of its major counterparts yesterday as the markets showed a surprising degree of disappointment to yesterday’s unchanged voting pattern within the MPC’s March meeting. Many renewed hopes for an early BoE rate rise, based on Tuesday’s shocking UK inflation data, will have been dashed by yesterday’s minutes. Today’s UK retail figures, expected to be poor, may well add to sterling’s downside.

Elsewhere, the single currency was also on the back foot amid a fresh wave of eurozone debt concerns, soaring peripheral borrowing costs and disappointment over the delay of a European bailout agreement until June. The aussie and kiwi dollars performed will, with New Zealand dollar in particular benefitting from some unexpected growth figures.

STERLING/EURO:

Sterling recovered early losses against the single currency as eurozone troubles took the edge off disappointing MPC minutes.

The markets responded negatively to the MPC’s ongoing 6:3 split in the interest rate vote, especially as the tone of the minutes was notably less hawkish than many had hoped. Meanwhile, the UK budget announcement, for all its detail including a downward revision to economic growth for 2011 from 2.1% to 1.7%, had little impact.

Sterling’s morning losses were largely recouped thanks to the Portuguese PM’s resignation and worries that a possible Portuguese bailout could trigger a renewed debt crisis in the periphery. News that Moody’s may be slashing the credit rating of Spanish banks is adding to the euro’s woes, preventing sterling from sliding below €1.15.

The EU Summit begins today with an air of disappointment as the key bailout decision has been postponed. However, Britain’s retail sales data due at 09:30 is the immediate focus.

STERLING/US DOLLAR:

Sterling eroded recent gains against the greenback yesterday as the MPC remained dovish on interest rates.

Sterling steadily declined against a broadly stronger US dollar as the MPC’s minutes disappointed. Safe-haven flows related to eurozone debt also saw a weak euro dragging the pound down but this pair is finding some decent support around $1.62 for the time being.

If today’s UK retail sales are as bad as expected, we can expect sterling to come under further pressure as more doubts are cast on the UK’s recovery in the wake of Osborne’s downward revision of UK GDP in 2011. Looking ahead to next week, renewed concerns over the eurozone are also likely to weigh.

EURO/US DOLLAR:

The euro suffered yesterday amid growing concerns of contagion; Portugal’s woes could bring further pressure to the rest of the eurozone periphery.

The dollar withstood more weak US homes data yesterday (17% monthly drop) as investors responded euro-negatively to news that the EU Summit’s Friday deadline for agreeing a bailout fund has been pushed back until June.

The euro also suffered as Portugal’s parliament rejected its government’s deficit-reduction plan, causing the resignation of the Portuguese PM and the country’s bond yields to reach record highs; a bailout in the short-term now seems likely. Currently trading just below $1.41, this pair is likely to remain under pressure as long as debt concerns are in vogue.

STERLING/AUSTRALIAN DOLLAR:

Having suffered a bad day across the board yesterday, sterling slunk down to 1.60 but is holding steady this morning amid rising risk aversion stemming from the eurozone.

The aussie was well supported as gold, one of Australia’s major exports, rose to a whisker of its all-time high ($1,444.40 per ounce) as disappointing US housing data and ongoing Libyan unrest, renewed the metal’s safe haven appeal.

A positive Financial Stability Review issued from the Reserve Bank of Australia is also helping to underline aussie support this morning but the brewing eurozone debt concerns look set to stem further gains.

STERLING/NEW ZEALAND DOLLAR:

The New Zealand dollar rebounded strongly after data revealed that the economy has avoided dipping back into recession.

Widely held expectations had called for negative, or at least stagnant, economic growth, but fourth quarter GDP actually came in at 0.2%. The surprise, though small, has sparked a relief rally in the kiwi as the market had been pricing in a more negative number, which has left sterling over a percent lower at 2.17.

With the data now passed, equity prices and levels of risk appetite will return as the main driver of this pair. With concerns over Portugal now back in focus, and the situation in Libya showing no signs of easing, risk appetite could prove thin on the ground in the near term, which may put pressure back on the kiwi.

STERLING/CANADIAN DOLLAR:

The pound failed to hold onto early gains against the CAD yesterday, being driven down by UK announcements with the pair currently trading below 1.59.

In the near term any Canadian dollar weakness will be driven by political uncertainty as opposition to PM Stephen Harper’s fiscal plan sets the stage for an election as early as May.
However, in the longer term, the fundamentals underling the Canadian economy – high commodity prices (notably oil) and US growth prospects – are likely to keep the loonie on top.

In line with its broader market movements, the pound is again slightly lower this morning with near term upside looking unlikely even amid the eurozone troubles and rising risk aversion.