Forex: Weekly review
Sterling and the euro took diverging paths this week as the outlook for interest rates in the UK and the eurozone assumed more clarity.
Inflation in the UK was shown on Tuesday to have hit its highest annual rate since 2008 in April at 4.5 per cent, up from 4 per cent in March.
Sterling rallied in the immediate aftermath, investors thinking that the Bank of England would be forced to lift the UK’s main interest rate from its historic low of 0.5 per cent by at least 25 basis points before the end of the year.
On Wednesday, though, minutes from the Bank’s May monetary policy committee meeting showed 6-3 split in favour of holding rates. But for one of the three calling for a rate rise, Andrew Sentance, who advocated a 50bp rise, this was his last rate-setting meeting.
His replacement on the MPC Ben Broadbent was expected to take a stance broadly in line with the majority of members. Even the remaining two hawks on the committee, Spencer Dale and Martin Weale appeared to be faltering in their support of a rate rise.
Mervyn King, Bank governor, has maintained throughout the current wave of inflation rises that price pressures would drop towards the end of the year as VAT increases and higher commodity prices damp demand.
Eurozone debt concerns drove a late surge in haven buying of the dollar on Friday.
Sterling was 0.1 per cent lower over the week. The euro remained 0.3 per cent higher over the week, in spite of a 1% fall on Friday as eurozone debt concerns came to the fore.
Fitch downgraded its long-term sovereign debt rating on Greece from double B plus to B plus, and put the country on “rating watch negative”.
This overshadowed Monday’s data showing eurozone CPI rose to 2.8 per cent in April, from 2.7 per cent in March. The euro was 0.4 per cent higher versus the pound at £0.8741.
The yen fell lastweek, as Thursday’s growth data showed the Japanese economy slipped into its third recession in a decade . The Japanese currency lost 1.1 per cent against the dollar over the week and was 1.4 per cent weaker against the euro.
Gross domestic product fell by an annualised 3.7% in the first three months, after a revised fall of 3% in last quarter of 2010. Analysts had expected the economy to contract by just 1.9%.