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By Gaurav Kashyap, Head of DGCX Desk at Alpari ME DMCC
With the European sovereign debt crises returning to the forefront of economic commentators' minds, and the uncertainty of the Fed's future actions with regards to QE3, traders are pouring into the British Pound as an alternative. The recent news flow from the UK has done much to improve the prospects of the British Pound; this week saw the all important BOE meeting minutes release, UK employment & inflation data topped off by strong retail sales figures.
Bank of England minutes show swing to hawkish approach
Wednesday's BOE minutes was the primary driver of upside moves in the Pound - the most recent minutes suggesting the BOE have adopted a more hawkish approach to inflation and the MPC voting pattern changing to 8 in favor of maintaining easing measures with 1 in favour of increasing measures.
In the two minutes releases leading up to Wednesday latest minutes, there had been two members calling for more measures, but with Posen now stopping his calls for more easing, markets took it as a cue to not expect any measures from the BOE next month. Although inflation has been mixed (YoY Consumer Prices increased to 3.5%, Prev 3.4% with Core YoY CPI also increasing to 2.5%, Prev 2.4%) the economy had shown enough signs of underlying growth to warrant the change in his vote.
No sign of further UK QE, despite inflation data
Tuesday's inflation data will throw a spanner in the plans of the BOE, as prices seem to have plateaued, and still remain well above the BOE's target of 2%. The uptick in overall inflation was as a result of higher food and clothing prices, but more alarming for the Bank is that Core CPI - stripped of volatile asset categories like energy, food and tobacco increased to 2.5%.
The expected hawkish views towards higher inflation will make it even less likely the BOE will introduce additional measures next month, with the current £325bn QE plan wraps up in May. With no QE for the Bank in the near term (prospects still remain for additional easing at some point this year), the Pound rallied and found further buying interest following a run of improving data - UK jobless claims dropped to 3.6K, Exp 6.0K, Prev 4.5K with the ILO unemployment rate dropping a notch to 8.3% from 8.4% previously.
The British Pound will continue to revel in its newfound popularity, as Spain will come more into focus, seeing the EURGBP remaining under pressure. 0.8165 has proved to be a key support level in the pair and should provide a good support level in the cross in the week ahead.
Euro sees gains on US Dollar on improved market sentiment
News flow from the Euro-area was on the lighter side this past week but the Euro made some big strides against the US Dollar on the back of improved market sentiments following recent Spanish debt raising activity and optimism following the IMF's announcement that their bailout fund would be increased to $1 trillion. This past week saw the Spanish government auctioning €2.54bn in 2 year and 10 year bonds, above the €2.5bn target.
Despite higher yields in the auctions, markets took comfort from the demand - the 10-year was 2.42x the amount sold (2.17 at the last sale).
Improving data from Germany also had its positives on risk appetite; Tuesday's German ZEW survey improved to 23.4, Exp 19.0, Prev 22.3 while there were upticks in all three German IFO surveys for business climate (Act 109.9, Exp 109.5, Prev 109.8), current assessment (Act 117.5, Exp 117.0, Prev 117.4) and expectations (Act 102.7, Exp 102.3, Prev 102.7).
Staff
