Home Testing times for sterling

Last week was for the euro and this week is likely to be for sterling to take centre stage. The issue for the BoE Inflation Report on Wednesday will be the extent to which the Bank continues with a policy of forward guidance in the face of what has been better data on the economy and signs of further buoyancy in the housing market.

Things were complicated enough back in February when the Bank focused on a wider range of indicators in terms of framing its forward guidance policy. This time around, the question is whether it is down to the bank to cool things, or the Financial Policy Committee (FPC), who are tasked with using their powers to reign in lending should it believe there are risks of a bubble forming in the housing market. They don’t meet until mid-June, but they are likely to be increasingly in the spotlight in coming months. For sterling, any signs of the Bank backing down on forward guidance will be taken as positive, at least initially.

Ahead of that, today is likely to be a day of markets holding within recent ranges. The dollar has regained its poise in the past few sessions, although much of this has been against the weaker euro. The Aussie continues to look on good form, with the overnight release of business confidence data coming in firmer than expected and giving the Aussie some support at the margins. In emerging markets, both the South African rand and Indian rupee are in the spotlight after recent elections.

No surprise with continuation of ANC in South Africa, but even with the currency at its strongest level this year, there are certainly challenges ahead for the economy. The Rupee is also firm as India’s election draws to a close and both reflect a stronger performance from emerging market currencies in general, helped by the weaker tone to the US dollar vs. expectations this year. Further gains though could struggle, given that the authorities could start to become concerned as to the domestic impact of the firmer currency. As always with emerging markets, it’s a matter of timing.

Further reading:  Could EURUSD Be The Trade Of The Year?

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