Sterling falls very low, interest rates also to stay at record low

We continue our daily look at factors affecting currencies allowing some insight into market conditions affecting exchange rates. Cash and income timing for UK Pensions and QROPS should be considered to maximise the Pension, QROPS and investment income and benefits taken. 
Investment market volatility and currency exchange remains a challenge. Things are still very volatile and we are in unique global influencing territory.  In conjunction with investment returns, currency exchange continues to concern many expats with UK Pensions, QROPS and now QNUPS.

After Wednesday's Inflation report, we saw sterling rally on the back of hints from Mervyn King of higher inflation, bringing back to the table, the subject of interest rate hikes. In contrast yesterday's weak UK industry data brought back the debate of whether it would be
a good move to do so, on top of the fact that UK growth was downgraded also on Wednesday.

Sterling fell to a 3-week low against the dollar, which bolstered expectations that interest rates will be kept at a record low this year because of a fragile economy. We saw the pound plummet to a session trough of $1.6233, its weakest level since mid-April.

Adding to our woes, data showed UK industrial output rose 0.3% in March after a 1.2% fall in February, which was less than the 0.8% gain by economists.

So, as mentioned, after Wednesdays report had boosted sterling and the chances of a rate hike, Thursday's data had forced markets to reassess the situation, with a rate hike again being pushed back to the end of the year or early 2012.

Over in Europe, however, the International Monetary Fund said the ECB should tread carefully on interest rates, after ECB policy maker, Juergen Stark left little doubt that a further rate hike was on the agenda.

The IMF was said to be ready to aide Greece if needed,
but urged the ECB to play its part by taking a cautious approach to interest rate increases.

"We need to keep in mind that the recovery in the euro area is under way, but it is not extraordinarily strong or dangerously strong, so there is no reason from that perspective to start tightening (monetary policy) sharply", said the IMF's European Department Director,
Antonio Borges.

In the US, data showed that their economy had struggled to gain momentum early in the second quarter, with retail sales posting their smallest gain in nine months in April as high food and energy prices took their toll and drove away spending from other areas, although
upward revisions to March's data suggested consumer spending might have been stronger than initially thought.

"The rise in retail sales were basically related to higher gasoline prices. Overall the report was good because it was positive, but the  conomy and consumers are still having trouble", said a senior economist at Wells Fargo Securities in Charlotte, NC.

In addition, other data also showed new claims for jobless aid had fallen 44K to a seasonally adjusted 434K last week, but remained too high to point to a strong labour recovery.

IN THE UK

• Sterling hits 3-week low versus dollar after weak UK industrial data, hitting a low of $1.6233, its weakest since mid-April
• Weak UK industrial data provides realisation that UK rates could stay at record low until at least late 2011 or early 2012 in stark contrast to hawkish comments from Bank of England's King on Wednesday which drove GBP buyers into a frenzy.
• Analysts see a fall towards $1.60 as investors continue to price out additional rate increase by Bank of England
• UK output rises 0.3% in March less than 0.8% forecast by economists

ELSEWHERE

• ECB policy member, Stark, leaves little doubt that a further rate hike is on the drawing board
• The IMF strongly urges the ECB to tread carefully when approaching the subject of interest rates.
• The monthly ECB bulletin reiterates the ECB will continue to monitor "very closely" the developments and the upside risks to inflation
• Article in Financial Times said Irish and Greek bailouts have simply not worked.
• The US sees its Retails Sales rise 0.5%, ex gasoline up 0.2%, with core retail sales gaining 0.2%
• US Initial Jobless claims fall to 434K but not enough to point to a strong recovery in US labour market.
• Norges Bank raised rates yesterday by 25bps as expected, but did not reveal future outlook.
• German Q1 GDP figures released this morning much better than expected, along with good figures from France helps the euro make gains early this morning.

DATA TO LOOK OUT FOR

• Another fairly busy day for data today continues with another speech from ECB's President Jena Claude Trichet. The tone of last week's speech was far more dovish than expected and caused the euro to fall significantly, will the tone be any different today.
• Collective Eurozone Q1 GDP figures are released at 10.00am and follow from the individual figures from earlier, Trichet said last Friday he expects to see continued growth, the results of will form a major topic in Trichet's speech and could cause to retrace recent losses.
• At 1.30pm US Consumer Price Index is published, another indicator of inflation and is also likely to show a rise in prices.
• 2.55pm sees the release of the Michigan Consumer Confidence Index and will show how consumers on the street feel about the economic outlook, a high reading is good for the USD and this month the figure is expected to rise slightly to 70.0 from 69.8




Gerard Associates Ltd advises expats and people considering living abroad on the technical and currency options available for Pensions, QROPS, QNUPS and investments in a clear format allowing all customers to make an informed choice. Our service encompasses Pensions, investments, currency exchange and guidance on taxation in most popular ‘sunnier' climates. This with the re-assurance and security of UK authorised and regulated advice – essential tools for your security.