Currencies

Monday May 12, 09:03 AM
Forex - Euro, pound remain weak against dollar

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LONDON (Thomson Financial) - The euro and the pound remained soft, mostly against the dollar, on expectations that interest rate differentials are set to shift in months ahead.

The euro has suffered from weak economic data -- in consumer

and business confidence, retail sales and manufacturing activity -- which have suggested that the euro zone is set for a sharp slowdown in growth.

The common currency was not buoyed for long by hawkish rhetoric on Thursday by the European Central Bank, which remains concerned about inflation, as markets look through the talk and have swung from expecting a rate hike later this year to now pricing in a cut.

'Short speculative euro positions... are likely to remain in force until weaker U.S. data (which we expect to persist) balance up current pro-dollar sentiment,' said Gavin Friend at Commerzbank (Xetra: 803200 - news) .

The dollar has indeed benefited from more positive comments by the Federal Reserve, which has signalled a pause in its cycle of rate cuts. Combined with the U.S. government's first cash payments to households and a greater focus on inflation risks, the news has buoyed the greenback against other currencies.

Inflation data on Wednesday and retail sales on Tuesday will be key in market's views of future interest rate assumptions.

'Much of the recent dollar appreciation is on the back of speculation that the country's economy may have turned something of a corner so anything that serves to derail this observation will ultimately end up weighing on the greenback,' said James Hughes at CMC Markets.

The pound, meanwhile, also remained weak on deteriorating economic fundamentals in the UK. Although inflation is keeping the Bank of England from cutting rates aggressively, the market widely expects another move in June.

Data for producer prices today will remind investors of the dangers of inflation, with input prices forecast to rise a massive 21.7 percent on the year in April, helping the pound to recover.

The Inflation Report, released by the BoE on Wednesday, is also expected to underscore the price pressures in the economy and may support the pound as the central bank makes clear that it is unable to cut rates as quickly as the economy might need.

London 0840 GMT Tokyo 0450 GMT

U.S. dollar

yen 103.64 up from 103.35

Swiss franc 1.0489 up from 1.0472

Euro

U.S. dollar 1.5403 down from 1.5412

yen 159.64 up from 159.32

Swiss franc 1.6156 up from 1.6142

pound 0.7905 down from 0.7914

Pound

U.S. dollar 1.9486 up from 1.9480

yen 201.96 up from 201.40