German inflation key to ECB rate cut

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Our hopes of a slight euro revival proved to go unfulfilled yesterday with the slight uptick seen at the beginning of the day following encouraging news from Greece and Spain over the weekend dissipating by the close of business. In any case, the move was not expected to be a large one but still could be on the cards. The impetus that it would need however, would need to be fairly significant given the wall of money still in position to smash the single currency lower.

Continuation of EURUSD lower would likely see GBPUSD follow in the short term as the move in to safe haven assets intensifies. The general feeling of things is for losses in sentiment throughout the week but with such a data heavy close before the weekend (Irish referendum, PMIs and US jobs numbers) anything could really happen.

Sterling has had a couple of rough weeks against the dollar and we can now see the main reason in UK interest rate expectations. The SONIA (Sterling OverNight Interest Accrual) curve shows us how the Bank of England’s various policy statements are interpreted by the market and how likely therefore changes to interest rates in the UK are. In recent weeks we have seen the curve start to show an increased probability (around a 45% chance) that the base rate in the UK will be cut by November.

This will be as an obvious result of further weakness in the UK and global economies in recent months. We still think an interest rate cut is not going to happen however. The marginal benefit of a 25bps cut would be very little as consumers still remain reticent to spend and spare cash would be likely to be used for savings or the paying down of debt, none of which stimulates the economy. If the Bank of England is looking to further monetary policy easing it will be via further QE in our eyes.

With the US closed yesterday for Memorial Day the session was a little dull but with everyone back at their desk we can expect to see further moves. German inflation will be closely eyed this morning to see whether it can sustain further rate cuts from the ECB. Some commentators are expecting a 25bps cut from the ECB next week but should German inflation be above target I think we can kiss that goodbye.

This afternoon we get US consumer confidence which looks to have topped out already this year. Analysts are expecting a slight increase however, which we believe to be a mistake and look for USD strength this afternoon as a result.

Indicative Rates Sell Buy
GBPEUR 1.2496 1.2525
GBPUSD 1.5700 1.5723
EURUSD 1.2545 1.2567
GBPJPY 124.73 125.00
GBPAUD 1.5875 1.5903
GBPNZD 2.0571 2.0599
GBPCAD 1.6031 1.6060
NZDUSD 0.7621 0.7641
GBPZAR 13.04 13.09
USDZAR 8.2927 8.3365
GBPPLN 5.4125 5.4420
EURJPY 99.63 99.91

Please note these rates are “interbank” rates ie they indicate where the market is currently trading and are not indicative of the rates offered Rates are dependent on amount transacted. It is important to remember that foreign exchange rates fluctuate all the time. The rate you will receive will depend on the amount and currency you require.

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