Sterling falls against euro, dollar; markets await inflation report

Tom Tong11/Μαΐ/2011Currency Updates


Sterling lost ground against the euro and US dollar during Tuesday trading despite British retail sales rising by 5.2% in April – the fastest annual pace in five years. Many investors have already begun selling out their sterling positions prior to the Bank of England’s inflation report due out today as worries remain about the economy’s growth prospects. The inflation report is anticipated to forecast higher inflation in the short term, with Governor Mervyn King expected to defend his decision to keep interest rates at the record low of 0.5%. Nervous investors are bracing themselves for further sterling depreciation if the bank signals a retraction in its growth forecasts which will subsequently push back the chances of a rate rise even further.


A mixed days trading for the euro witnessed the single currency cement gains against the pound – however, after a volatile session it closed pretty much unchanged against the dollar. The choppy trading was a result of conflicting reports on a potential aid deal for debt-laden Greece. The euro was up against the dollar after a report suggested a 60 billion euro package could be implemented as soon as June in order to help meet its funding requirements; however, after a Greek denial the currency sold off. Greece’s debt situation continues to cause a furore in the markets, with analysts suggesting that a restructuring of its debt may be the only legitimate route forward to make its debt burden sustainable. Debt reductions, or haircuts, of between 50% and 70% of the bonds’ original value could be needed. The euro is also under pressure as falling commodity prices notably oil are allowing the ECB to loosen their monetary policy.


The dollar benefited on Tuesday from uncertainty in the UK regarding the Bank of England’s inflation report coupled with the underlying debt problems emanating from Greece. The dollar index, however, which measures the greenback against a basket of six currencies, traded at 74.57 which was broadly flat. The major economic data out of the US today comes in the form of the March trade balance. Analysts are forecasting for a slight trade deficit MoM, which may see the dollar weaken slightly.


Written by Tom Tong

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