UK data fails to lift the pound

The markets remain range bound today. The dollar looks weak as we lead up to the Federal Open Market Committee (FOMC) minutes later this evening, the euro has regained its footing and sterling has come under pressure after further lacklustre economic data for March. Risky assets are benefiting from some dollar weakness and investors picking up bargains in the stock market after the recent sell-off. Commodities are also higher. Brent crude also looks like it may try and test key resistance levels at $112.20 per barrel.

But looking at the bigger picture, markets remain jittery and it is difficult to spot any directional trends, especially in FX. Is the dollar rebound under way? We don’t know. Will the euro finally get hit by sovereign debt concerns? It still looks fairly comfortable above 1.4000 versus the greenback. This time last week it looked like the markets were about to turn a corner, but then investors got cold feet.

The problem lies with the dollar. While the Federal Reserve remains committed to keeping interest rates low even once QE2 expires next month then risky assets and high yielding currencies are likely to remain in demand.

Today’s minutes from April’s FOMC meeting are the big event this afternoon, although we don’t expect the minutes to stray from Ben Bernanke’s first post-policy decision press conference when he remained tight lipped about the pace of monetary policy normalisation and continued to voice concerns about the pace of economic recovery.

The latest Bank of England (BOE) minutes combined with labour market data caused the pound to come under downward pressure this morning. The Monetary Policy Committee(MPC) voted 6-3 to keep rates on hold, as expected. The minutes noted that there remained substantial uncertainties and a wider than usual range of views among Committee members, regarding the outlook for growth.

The minutes also included the BOE’s projections on GDP and inflation contained in last week’s Inflation Report. Inflation hitting 5 per cent by the end of this year was still a possibility the minutes noted. However, the Committee also noted that there are few signs that the recent period of high inflation was feeding into stronger medium-term inflation expectations.

All in all these minutes show the MPC is continuing to have the same discussions they have been having for months and that means rates are unlikely to change until the outlook becomes clearer.

The latest unemployment data for March was also released this morning and is unlikely to materially impact the BOE’s current stance of keeping rates on hold. Although the unemployment rate fell to 7.7 per cent from 7.8 per cent in February, the claimant count rate was higher at 4.6 per cent versus expectations of 4.5 per cent. The wage data was no less cloudy. Wages including bonus rose by a larger than anticipated annual rate of 2.3 per cent, versus expectations of 2 per cent. However, wage growth excluding bonus fell to 2.1 per cent from 2.2 per cent in February. The FX market reacted negatively to this data and priced out yesterday’s increase after the strongest CPI rate for two years. GBP/USD is below 1.6200 and EUR/GBP is testing 0.8800 resistance.

The outlook for the UK economy is extremely cloudy. The Bank of England even finds it difficult to judge the outlook for growth and prices, which indicates how hard it has been for investors to trade sterling recently. Overall, we think sterling’s movements will be dictated by external factors including where the dollar is heading and how strong the euro is. There may be some further weakness from here, but overall, we think that the pound still looks fairly well supported above 1.6000.

It looks like the EU authorities are still debating the idea of a debt restructuring for Greece. European Central Bank member Bini Smaghi rejected the idea of either a hard (haircuts) or soft (increasing the length of loans) restructuring this morning saying that it would “jeopardise all of Europe”. This stands at odds with Eurogroup chairman Jean-Claude Juncker who said yesterday that a “soft” restructuring may be on the cards if Greece agrees to further austerity measures. So even after the two-day meetings of EU authorities we still none the wiser as to how Greece’s continuing financial problems will be solved.

Portugal held a €1 billion debt auction today. It went ahead with few problems and attracted healthy interest. The Iberian nation needs to pay up for debt in the capital markets though and the average yield was 4.657 per cent for one year. Putting that into perspective, some mortgage rates in the UK are better than that.

Elsewhere, the Aussie dollar is also coming under pressure after weaker consumer confidence and wage costs. This has gone some way to negate the hawkish Reserve Bank of Australia minutes from earlier this week. AUD/USD is now looking vulnerable above 1.0600.

Kathleen Brooks is research director at Forex.com

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