Confidence surrounding the UK economy is likely to remain slightly stronger in the short-term. There has also been a shift in Bank of England expectations with reduced speculation surrounding further quantitative easing after Posen’s decision to move away from backing further action. The UK currency will also be in a position to gain support from a lack of confidence in the Euro-zone and potential defensive inflows. The UK situation is still very fragile and the currency will be generally vulnerable when global risk appetite deteriorates.
Sterling maintained a robust tone as the trade-weighted index advanced to 18-month highs with the UK currency at a five-month peak against the dollar.
The headline UK inflation rate rose slightly to 3.5% for March from 3.4% previously as prices failed to match the declines seen last year. The latest unemployment data was stronger than expected with an increase in the claimant count of 3,600 in the latest month from a revised 4,500 previously while the unemployment rate dipped to 8.3% from 8.4%, which was the first decline since the third quarter of 2011.
The Bank of England MPC quantitative easing vote was surprising with a 8-1 vote for keeping the total bond purchases on hold at GBP325bn. In particular, markets reacted strongly to Posen’s decision to vote for the majority and drop the call for further monetary action as he has been consistently the most dovish committee member.
The bank was more concerned over the inflation outlook and the risk of stubbornly high price pressures. The central bank was still concerned over the risks of recession, but the net outcome was a drop in expectations surrounding further quantitative easing. The shift in expectations pushed Sterling to fresh 20-month high beyond 0.82 against the Euro.
Posen confirmed that he had taken a different stance than that in 2011 with reduced fears surrounding a sharp deterioration in economic conditions. Posen also stated that the economy was stronger than would be registered in the official growth data.
Swiss franc:
There is the potential for further defensive flows into the Swiss currency in the short-term, especially with increased Euro-zone structural fears. The National Bank may continue to be tested more severely in the short-term as markets again attempt to take out the 1.20 minimum level. The central bank is likely to hold the line in the short-term. A lack of attractive alternatives should still provide net support for the Swiss currency and any reversal in policy could trigger a surge in volatility with sharp franc gains, although this is not the most likely outcome.
The dollar was unable to extend gains above 0.92 against the Swiss franc during the week while the Euro was unable to move significantly away from the 1.20 level.
The latest ZEW business confidence index recorded an increase to 2.1 for April from 0.0 previously. The National Bank was the main focus of attention with Jordan appointed as permanent chairman. He reinforced his commitment to the current policy and the determination to defend the 1.20 minimum Euro level. There was some renewed speculation that the bank could raise the minimum level.
There was further speculation over defensive capital inflows into the franc as Euro-zone structural fears remained an important focus. There were reports of the BIS Euro/dollar selling on behalf of the National Bank which suggested that there had been persistent intervention to protect the 1.20 minimum level. |