The European single currency started the week well against both the US dollar and the British pound, although the recent high’s soon gave way to profit taking and a rather strong reversal certainly against sterling.
Monday saw the pound trade at its lowest level against the Euro since June 2014 at €1.2350 as concerns that the UK economy is slowing and will continue to do so until the outcome of the UK EU referendum vote is known.
June 23rd seems like a long way away, however with the opinion polls now suggesting the leave vs remain in campaigns are now on equal footing, the uncertainty has left Sterling with few friends.
There was however some respite to the recent declines for the pound as the UK’s CPI Consumer Price Index inflation reading rose to 0.5% for March ahead of market expectations, up from February’s 0.3%. The early Easter break with the obligatory rise in air fares certainly contributed to the spike. Whilst inflation remains a long way from the Bank of England’s targeted level of 2%, any uptick does alter the UK’s interest rate expectations, helping to firm the British pound.
All nine members of the Bank of England Monetary Policy Committee voted to hold the bank interest rate at 0.5% as expected. Whilst inflation may again be creeping higher, Bank of England Governor Mark Carney was keen to warn that there is no hurry to raise UK interest rates and certainly not prior to the outcome of the referendum on UK’s membership of the EU being known. Rightly or wrongly he did share his concerns that a leave vote may potentially damage the not only the UK, but European Union and global economy activity levels.
Having traded over 1.26 after the inflation numbers were released, sterling dropped back to the mid €1.25 levels on Carney’s statement.
From the USA there was little on the economic data release front. The US dollar gained strength over the week as more regional Federal Reserve Presidents lay weight to the view that two US Interest rate hikes, possibly three, will be needed throughout 2016, as the US economy continues to grow, unemployment falls further and inflation levels start to climb. Such hawkish signals are hard to ignore with the diverging monetary policies of the USA verses that of the ultra-loose Eurozone favouring the dollar over the Euro. The Euro briefly traded at a five month high verses the US dollar at $1.1465 only to drop back down to $1.1231.
From Europe we did see a slightly higher inflation rate. March CPI came in at 0.0% up from a negative 0.2% in February.
The Eurozone economic outlook is still filled with uncertainty and Brexit will certainly not help. The March composite PMI survey adjusted higher to 53.1 and is looking fairly comfortable in expansionary territory. Similar signs have been seen for the region’s biggest economy, Germany, where both the IFO and ZEW surveys posted higher levels recently.
The ECB will certainly maintain a cautious view with next week’s meeting unlikely to see any further near term alterations to policy. It can be expected that an overall dovish tone will prevail and that the ECB will be ready to act upon any Eurozone wobbles.
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