The release of the Monetary Policy Committee (MPC) minutes yesterday saw Sterling weaken rapidly against the Euro; in fact, I was still reading the first word ‘minutes’ on the front page when Sterling dropped off.
The sharp drop off in Sterling was due to the MPC minutes revealing a more dovish tone from the previous meeting; this means that the possibility of a rate hike in the near term appears very unlikely. The quote that appeared to suggest that some of the dovish members saw the case for a rate hike strengthening has been removed. In its place was the quote from two MPC members, expected to be two of the hawks, that the case for a rate hike was ‘finely balanced’. There also appeared to be a growing concern around consumer confidence with specific reference to the negative effect any rise in rates could have.
Spanish 10 year bond yields increased yesterday, showing that the euro zones fourth largest economy is not immune to ‘contagion fears’. However most importantly there was strong demand for Spanish debt at the auction meaning that Spain has some near term relief. This all meant that the Euro strengthened against both Sterling and the Dollar over the course of the day and a strong end to the week can be expected.
Sterling strengthened to a 16 month high against the Dollar as US earnings boosted market sentiment, meaning that the currency market looked to diversify into riskier currencies. Sterling is expected to continue its trend higher against the Dollar but continue its decline against the Euro as interest rate differences remain the main focus.
In Germany, the main news release is the Ifo business survey for April which is expected to fall back, reflecting the view that the rapid expansion seen in the German economy may be coming to an end. Results for the UK today are so far mixed so will provide little impetus.