Sterling touches five week low versus Dollar on higher US yields

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25 April 2018


The Pound touched its lowest level against the US Dollar in five weeks on Tuesday morning, although recovered during the London session as investors temporarily put aside concerns about the performance of the UK’s economy.

terling lost ground in the five straight London trading sessions through to Monday as investors fret over the fading possibility of another interest rate hike from the Bank of England next month. A much better-than-expected set of government lending figures yesterday morning alleviated some concerns, with borrowing figures falling to their lowest level in 11 years.

The rally in the US Dollar eased across the board yesterday, with the currency fairly range bound against the Euro at around its strongest period since the beginning of March. US 10-year Treasury yields continued to edge higher, rising above 3% for the first time in over 4 years, although this failed to translate into meaningful gains for the greenback. The spread between the US 10-year and corresponding yield in Germany is now at its highest level since 1989 (FIgure 1).

Figure 1: US/Germany 10Y Government Bond Yield Spread (1985 – 2018)

Meanwhile, in the Eurozone, the latest German IFO business sentiment data was a disappointment, adding to concerns that the Eurozone economy could be set to slow in the first half of this year. The main business climate index slipped to 102.1, while there was also a sharp downward revision to the March number to 105.7 from the 114.7 estimate.

ECB set to maintain cautious approach in April meeting

Today looks set to be a fairly quiet day in terms of macroeconomic news. Investors will instead be turning their attention to Thursday’s European Central Bank meeting for any clues as to the likelihood that its QE programme will be brought to an end later in the year.

We think that the ECB will opt to maintain its fairly cautious tone. Recent macroeconomic data out of the Euro-area has been soft since the last Governing Council meeting in March, while external risks, including the possibility of a global trade war, could be clouding the outlook. The central bank will not be upgrading its economic projections, including its growth and inflation forecasts, until the June meeting, but we think President Draghi will acknowledge the soft data witnessed during the first quarter.

In light of the recent macroeconomic news, we think that another short extension in the bank’s quantitative easing programme beyond September is now on the cards. We see a good chance that the programme could be extended until December 2018, which would include gradual reductions in the monthly purchases towards zero. We do, however, believe that any concrete announcements on altering monetary policy remain a little way off and expect no change in forward guidance tomorrow. The lack of any forward guidance could be seen as a disappointment and may pressure the Euro lower following this Thursday’s press conference.