Interest rate expectations will continue to drive currency movements in the short term as investors continue to seek out improved yield.
(PRWeb UK) March 24, 2011
According to Global Reach Partners Ltd, the European Central Bank (ECB) dropped its clearest hint so far that they could increase interest rates by 25 basis points to 1.25 percent in April. Markets reflect the fact that the ECB will increase rates by 125 basis points over the next 12 months; this has been supporting the currency's performance of late. One issue that may hinder the ECB from proceeding with a rise is the crisis in European sovereign debt; large cracks are reappearing in this area of the market. The US has seen some more upbeat market data in the last few weeks, despite this the FOMC are not contemplating hiking interest rates anytime soon. This in turn has been hindering the Dollar.
The outlook for interest rates in the UK is not so clear cut. In January the illusory economic outlook was shattered when Q4 GDP spooked the markets contracting by 0.5 percent. Chancellor Osborne was no doubt thankful that he had the snow effect to blame in December. The MPC's dilemma is the battle between inflation and growth. Inflation has registered above its target range for 13 consecutive months and is currently at a rate of 4.0 percent. This is due to the increasing price of oil and commodities, so the ongoing geo-political tension in the Middle East and Africa is the last thing the UK and global economy needs. This leaves the Bank of England stuck between a rock and a hard place. At present the voting members of the Monetary Policy Committee (MPC) are split four ways in what to do next. The cast of the last votes showed that members were split between expanding quantitative easing, keeping rates on hold and raising rates by 25 and 50 basis points. If rates are not increased by the end of May they may not rise for a while, the MPC will then be without their über hawk Andrew Sentence as he stands down. Our belief is that the majority of the central bankers will await the release of the UK's Q1 GDP figures before deciding what to do next. Recent figures from the GB plc have been mixed. Manufacturing has been growing at the fastest rate in 16 years, mainly due to a weaker Sterling. This should keep the shipping and transportation industries busy. However, the manufacturing sector in the UK only accounts for 16 percent of GDP. Elsewhere, consumer spending and confidence have started to dwindle due to the increase in VAT and ongoing austerity measures. This is not a good sign as the consumer accounts for as much as 73 percent of GDP. The recent British Retail Consortium figures showed that year on year sales had declined while various reports show that the housing sector in the UK continues to remain depressed. If the current trend is to continue, a double dip recession could be on its way; stagflation worryingly could well be riding on its coat tails. The headache of negative or anemic growth and soaring inflation is a nightmare scenario for central banks. If the UK was to see any of these outcomes play out it would make it difficult for our central bank to raise rates.
Interest rate expectations will continue to drive currency movements in the short term as investors continue to seek out improved yield. As it stands the Eurozone leads the way in 12 month rate expectations with an anticipated 125 basis points worth of hikes whilst the UK and US are predicted to rise 75 and 25 basis points respectively. This outlook could change very quickly as there are several factors that could alter forecasts. Despite Spring's imminent arrival we may have to wait longer for any sign of green shoots in the UK. We will no doubt become clearer on this issue with the first release of Q1 GDP due on the 27th April. Interest rate expectations could easily be scaled back from the ECB if the debt crisis continues to spread. For the US rates can only go one way, up, but the question remains when? Sterling's performance will depend, firstly growth data from the UK and secondly on the shifting sentiments surrounding rate expectations from the MPC the States and Europe.
By Jamie Jemmeson
Global Reach Partners: http://www.globalreach-partners.com
About Global Reach Partners Ltd
Global Reach Partners Limited has become a market leader in supplying commercial foreign currency and hedging strategies to the business sector. Based on Cornhill in the City of London, the company operates for institutions, large corporates and SMEs.
We help our clients with risk management; by providing guidance on foreign exchange strategy, through proactive commentary on developments and trends in the often volatile FX markets. From an immediate telephone response from a Senior Commercial Dealer, to the flexibility in drawing on funds, we provide an enhanced service which makes doing business with us easy.
The strength throughout the group and within all our trading brands is centered on trust and expertise. Our reputation as a client-first organisation and results-oriented business means that our ambition is one of constant progression and achievement.