Foreign Exchange Daily Market Update 18/05/11

The Pound saw a sharp appreciation in the currency exchange markets yesterday morning, following a bigger than expected rise in UK consumer prices. The data showed UK CPI at a 2 and-a-half year high of 4.5%, beating analyst’s estimates for a reading of 4.2%. However, the currency pared its gains later on as investors acknowledged higher inflation for now was unlikely to lead to an interest rate rise before year-end. Jeremy Stretch, currency analyst at CIBC commented ‘’ There were rumours of a strong figure around 4.4 percent, but it's higher than that’’, but added ‘’ Sterling hasn't really been able to push on after the knee-jerk reaction’’.

In a letter to the UK Treasury, Bank of England (BoE) Governor Mervyn King said that trying to bring inflation back to target quickly (by raising the key interest rate) would risk harming the economy and undershooting the central bank's 2.0 percent target in the medium term. Rate-setter Ben Broadbent, who will replace one of the most hawkish members of the Monetary Policy Committee (MPC), Andrew Sentence next month, told the government's Treasury Committee there remained "huge risks" both to raising or not raising rates, adding that he would have broadly followed the BoE's direction on policy, suggesting he does not share Sentance's strong arguments for raising rates.

This morning saw the release of the BoE’s minutes from the last policy meeting. There was little surprise when the minutes revealed no change in voting for either the key interest rate, or the central bank’s asset purchase programme; the MPC members voting 6-3 and 8-1 for the maintaining of the current interest rate and asset purchase target respectively. This news was closely followed by UK unemployment figures, which showed that the number of unemployed fell for the 3 months to the end of March by 36,000 to an overall figure of 2.46million. This change leaves the UK unemployment rate lower at 7.7%, down from 7.8%, but the claimant count actually rose from 4.5% to 4.6% for April.

The Euro currency has been on a downward trend through the early part of this week, particularly against The Pound, and yesterday’s disappointing ZEW Economic Sentiment survey results for Germany and the Euro-zone as a whole did little to provide the region with a boost. Turbulent times are ahead for the region, with IMF chief Dominique Strauss-Kahn currently behind bars at the Rikers Island facility in New York, facing charges of alleged sexual assault. His incarceration has thrown one of the world’s most powerful financial institutions into chaos, with market experts predicting that it could have larger ramifications for the European and global economy, and in turn the foreign exchange markets. Strauss-Kahn was the strongest voice behind muscular but often unpopular efforts to prevent debt defaults in Euro-zone nations, including Greece and, more recently, Portugal. The IMF’s temporary head, John Lipsky, is a highly respected former U.S. Treasury official and one-time JPMorgan Chase executive. But he’s not nearly as well-known in the political world, causing many to wonder whether the IMF will falter in making the case for widely shared contributions to financial rescue efforts.

The US Dollar weakened against most of its major counterparts during the overnight trade, but to be regaining its footing as investors scale back their appetite for yields. The dismal report for US housing starts yesterday and build permits may well have sparked a rise in risk aversion, and the rebound in the Dollar may gather pace, benefiting once more from its safe-haven status. However, the Federal Open Market Committee is scheduled to deliver its policy meeting minutes this evening. Any comments from the central bank are likely to heavily influence rate movement and we may see Chairman Ben Bernanke continue to highlight the ongoing weakness within the real economy as he aims to encourage a sustainable recovery, with chances of an interest rate-hike whilst the recovery remains frail remaining increasingly unlikely.