Daily currency report

Sterling came close to achieving two month highs against the euro, while advancing against the US dollar after the Bank of England revised higher its central medium term inflation outlook. The upward revision was not expected and markets were quick to begin pricing in tighter monetary policy by the end of the year in the UK. Fears of contagion from the European debt crisis were fanned prompting a sell off in commodity and equity markets. The risk reversal saw the euro trade sharply lower against most major currencies as focus will remain on the debt crisis and on new developments. On a positive note, Finland looks set to approve a Portuguese bailout package. The dollar advanced on the back of risk aversion and remains supported while the Aussie dollar was knocked lower in the Asian session.

Sterling

The Bank of England surprised markets by revising higher its inflation projection to just above 1.9 per cent in two year’s time. In a press conference following the release of the central bank’s quarterly inflation report, Governor King maintained a dovish tone, but also acknowledged that monetary policy can not remain at such levels forever.

US dollar

The US dollar jumped as a sell off in commodity markets led to a drop in equity markets, which prompted investors to become risk averse. In doing so, the unwinding of carry trade positions helped to strengthen the US dollar and weaken higher yielding currencies. Trade in gas and crude futures were halted on their exchange due to excessive volatility.

Euro

The euro looks set to remain under pressure. There is a battle raging in currency markets. On the one hand speculators are unwinding their long euro positions on renewed debt crisis fears, while on the other hand Asian sovereigns continued to be a large buyer of euro. The reserve diversification flow will help to minimise any euro weakness, but a short-term reversal of the Euro’s fortunes looks like it has further to go.

Japanese yen

The Japanese yen is weakening when equity markets are falling. The move is unusual for a currency that normally trades on risk aversion flows. There is a small possibility that the yen is feeling pressure from weak economic data that showed the country’s current account tumble in March. Additionally, bank lending figures slowed to 17-month lows.

Travelex Global Business Payments Malta, freephone: 800 733 22, www.travelex.com/mt/