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Dollar looking to be between a rock and a hard place at the moment

Publication date: 28 April 2011
Author: Duncan Higgins, CaxtonFX

As Britain gears up for the week’s main event – Royal Wedding Day – there’s still a lot to report from what is turning out to a be a busy few days in the market. Sterling received a much needed boost yesterday from a solid first quarter UK GDP figure, which put pay to the “double-dip” scenario. The UK economy grew by 0.5% last quarter, which was in line with market consensus, which perhaps explains why sterling failed to kick on significantly after an initial spike. Meanwhile, the US Federal Reserve also met expectations by keeping interest rates on hold at record lows and maintaining QEII, leading the greenback yet lower.

Looking to today’s session, the release of the US quarterly GDP figure is due at 13.30. The dollar looks to be between a rock and hard place at the moment; a strong figure will increase risk sentiment, whereas a disappointing figure will just reinforce views that the US economy cannot accommodate monetary tightening.

STERLING/EURO:

After testing multi-month lows at €1.12 early on in the session, sterling enjoyed a welcome upsurge as the UK economy returned to growth but gains are proving short-lived.

The UK’s half percent quarterly growth is certainly a positive sign but growth remains flat for the last six months. The figure at least keeps bets of a summer BoE rate rise realistic, but the truth is that a sustained sterling turnaround relies on consistently positive economic data which will convince the MPC the UK can withstand monetary tightening. Next week’s UK manufacturing, construction and services sector data is vital in this regard.

In light of Fed Chairman Bernanke’s comments last night, sterling may struggle for further upside against a single currency which remains the primary beneficiary of heightened dollar weakness. Currently trading below €1.1250, sterling may come under further pressure today against a consistently outperforming euro.

STERLING/US DOLLAR:

Sterling has scaled the dizzy heights of $1.67 this morning after the Fed remained decidedly dovish about the economic outlook for the US.

Sterling has hit its highest point since Nov 2009 against the greenback as the market responded negatively to the first ever Fed press conference. Whilst Bernanke commented that headline inflation in the US in climbing, underlying pressures remain subdued. Importantly, the “extended period” rhetoric was maintained with regard to the Fed’s ultra-loose monetary policy. Bernanke even stated that once the phrase is removed from the rate statement in the second half of the year, it could be a several meetings until the Fed raises rates.

The US quarterly GDP figure is likely to hold focus in today’s session. Bernanke downgraded the US growth outlook last night and an annualised figure of 1.9% is now forecast. Accordingly, consolidation above $1.67 for this pair seems realistic moving into the long weekend.

EURO/US DOLLAR:

This pair is again at fresh highs beyond key option barriers at $1.48, as the dollar sell-off moves to the next level.

The level of certainty that the Fed is to keep its monetary policy unchanged for many months to come is the deciding factor driving this pair higher. The ECB, by contrast, is expected to raise rates once again in July to fight much higher inflation levels in the eurozone. The fact that Greek two year bond yields rose above 25% for the first time went unnoticed, which is testament to the market’s remarkable apathy to eurozone debt problems.

The $1.50 level is now well and truly back in view. There seems to be nothing to stand in the way of the euro except a Greek debt restructuring; an inevitability which looks set to be delayed for a good time yet. The euro is up this morning and more gains seem a safe bet with the US GDP figure likely to disappoint later in the session.

STERLING/AUSTRALIAN DOLLAR:

Sterling only managed marginal gains against the aussie as above forecast Australian inflation data led speculators to bring forward expectations for a rate-rise.

Following the inflation figures, the Australian dollar breached the 1.09 mark against the US dollar for the first time since freely floating in 1983, and further gains are expected. There is now widespread speculation on yet another RBA interest rate rise later this year to curb higher prices.

With the US Federal Reserve keeping monetary policy unchanged last night, the aussie will continue to reap the benefits of a weak US dollar. This leaves the short-term outlook for the GBP/AUD pair fairly bleak, with the rate down at 1.5250, and nearing a four-month low.

STERLING/NEW ZEALAND DOLLAR:

For the first time in nearly a month, sterling gained over a percent against the kiwi dollar as the RBNZ kept interest rates on hold.

Gains for sterling following the UK’s GDP figure were extended when New Zealand’s central bank announced that its base interest rate was to remain at 2.5% and that this level could “remain appropriate for some time.” Governor Bollard worried investors with comments alluding to an “uncertain economic outlook,” with growth expected to be as low as 0.8% this year.

Bollard also described the elevated level of the kiwi dollar to be “unwelcome,” a good indication that investors should scale back hopes for further major kiwi gains. As all of this kiwi-negative information sinks in, sterling’s outlook finally looks a little more promising. This pair is currently trading at 2.07.

STERLING/CANADIAN DOLLAR:

Sterling climbed over a cent against the Canadian dollar yesterday as Bernanke commented on the prospects for weak economic growth.

Bernanke’s forecast that US growth in the first quarter will be “relatively weak” added to downward pressure on the loonie. With concerns emerging over the strength of demand from Canada’s number one trading partner, it’s not too surprising that Canada’s currency took a slight hit yesterday, though it did hold gains against an ever-weakening greenback.

The loonie itself remains out of focus this week, but will take the spotlight tomorrow when monthly GDP is announced. No growth is forecast, down from the previous month’s half percent increase. With this in mind, sterling should be able to eke out further gains from 1.58 moving into the weekend.

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