Intraday Market Thoughts

Sterling Dragged by Fading Rate Expectations

by Kyle Morrison
Jun 28, 2011 6:40

Sterling remains weighed down by low rates expectations ahead of final UK Q1 GDP, euro buoyed by optimism regarding Plan B, Japanese retail sales continue to show signs of recovery.

GBP sank to 8-month lows against a basket of currencies on the back of reduced expectations of a rate hike this year, as well as yesterdays disappointing housing data. Last weeks slightly more dovish Bank of England minutes have also dragged down the currency and todays final Q1 GDP figures probably wont alter that perception too much.

Next week the ECB is expected to raise rates again, given Juergen Starks comments yesterday, while the BoE looks like it will wait until next year at the earliest, despite the criticism levelled in its direction by the annual BIS report. The report suggested that the Bank of England was playing with fire with its current low rate policy. This prompted a rather sharp reaction from arch dove Adam Posen who branded the report nonsense.

Expectations for this morning'Q1 GDP figure seen unchanged at 0.5%, with the year on year figure remaining at 1.8%.

EUR, on the other hand, seems able to shrug off whatever the market can throw at it, buoyed by a combination of support from China, an agreement about some form of bank debt rollover for French and German banks as well as a Plan B in the event the Greek parliament decide to give two fingers to the forthcoming austerity budget in this weeks vote.

Obstacles still remain, and the recent acceleration of net outflows of cash from Greek banks shows that not everyone shares the recent optimism.

This morning the first reading for Gfk German consumer confidence for July is expected to slip back further from Junes disappointing 5.5 number to 5.3.

Earlier today in Asia, Japanese retail sales numbers for May continues to recover from the aftermath of the earthquake in March showing an increase of 2.4% , down from Aprils 4.1% rise, but double expectations of 1.2%. Larger retail items took a hit however coming in at -2.4% slightly worse than April's -1.9% decline.

Later today US consumer confidence data for June is expected to be released soon after US markets open.

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