Sterling breather

April 14, 2016

Sterling has been on a slightly better footing over the past week, with EURGBP moving down from the high just above the 0.81 level and cable bouncing from the 1.40 level. But the gains are hardly anything to write home about, especially against the background of the broader dollar weakness against EM currencies and also the Aussie over the same period. Today’s MPC meeting is unlikely to upset the tone, but nevertheless in the wake of the better than expected inflation data this week will be watched for any indications on the outlook for policy ahead. There continues to be a fairly strong split between market pricing and the ‘consensus’ form analysts survey, the latter looking for the first move in rates far earlier than the market. Interest rate differentials have nudged in the favour of sterling over the past week and this suggests further near-term gains are possible for sterling. That said, the potential for further losses in the run-up to the EU referendum remains strong.

Overnight, we’ve seen the Monetary Authority of Singapore effectively eased policy overnight by moving to a more neutral stance on the currency from the previous policy of “modest and gradual” appreciation. Being such a small but open economy, the exchange rate is the main policy tool and this change in stance reflects the weakening expectations surrounding their own economy which is itself a reflection of the more uncertain global environment. We’ve seen other Asian currencies weaken in the wake of the decision by the MAS, based on the fears that this could lead to a round of competitive currency devaluations in the region (e.g. Malaysia). Expect mentions of “currency wars” to increase in the press. Elsewhere for today, we see CPI data released in the US, where the headline rate is seen rising to 1.1%. The dollar is likely to remain cautious.

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