Sterling found further support above against the dollar on Tuesday with the firm labour-market data providing an element of support. A recovery in risk appetite helped underpin the UK currency as commodity currencies posted renewed gains and Euro short covering faded. There are very strong expectations that the Bank of England will increase interest rates again at the Thursday policy meeting, but there is seen as little chance that the bank will vote for a 0.50% rate increase which limited the potential for Sterling support, especially with concerns over the economic outlook. Sterling settled against the dollar after again failing to make any challenge on higher levels.
The Federal Reserve policy decision will dominate on Wednesday, but there will also be Sterling position adjustment ahead of Thursday’s Bank of England statement. Sterling traded above support levels against the dollar in early Europe. Volatility will spike later with the Fed policy and risk conditions crucial.
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The March German ZEW economic sentiment index collapsed to -39.3 from 54.3 previously and well below forecasts of 10.0. The current conditions index dipped to -21.4 from -8.1, although this was slightly above expectations. The Euro-zone ZEW expectations index also slumped to -38.7 from 48.6 previously.
According to the ZEW, falling economic expectations are accompanied by a sharp increase in inflation expectations and a recession is becoming increasingly likely.
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ECB’s Elderson speech
The New York Empire manufacturing index maintained recent volatility with a sharp decline to a 22-month low of -11.8 for March from 3.1 previously and well below consensus forecasts of 7.0. Companies, however, were more optimistic over the outlook. The new orders and shipments components also dipped into negative territory, but unfilled orders held firm while employment increased at a slower rate.
The inflation data was mixed with a small decline in the rate of cost increases offset by a faster pace of price increases to a record high while companies expect inflation pressures will intensify. The dollar was resilient despite the weaker Empire data as US yields resisted a significant decline.
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1.30pm Retail Sales (MoM)(Feb) Prev 3.8% Exp 0.4%