European investors will turn their attention towards the Bank of England and European Central Bank, where monetary policy announcements are expected. Both central banks are forecast to leave interest rates on hold. Sterling was knocked lower after Moody’s issued a warning over a potential downgrade to UK sovereign debt. Losses were limited as concerns over progress for a second bailout for Greece increased. The head of the European Central Bank is widely expected to signal further rate increases. Anything outside of this could risk seeing the euro trade lower. In the US, a warning from Fitch, helped to cap dollar gains.
Sterling
The Bank of England is expected to leave its policy unchanged and the rate announcement is expected to come without a statement. As a result, reaction to the event will be limited if it goes as expected. Sterling has managed to reclaim initial losses after the warning from Moody’s, a rating agency, who said that if the government failed to meet its fiscal consolidation plans and a more protracted slowdown in growth is seen, then it could lower the country’s AAA rating on government debt.
US dollar
US dollar gains were capped as Opec failed to increase its output quota which helped to push the price of oil higher. Also, the Fed’s Beige Book report confirmed that the economy showed signs of slowing, largely as a result of supply constraints from Japan, while Fitch, a rating agency, warned that it could lower its AAA rating of US debt to ‘junk’ status if the country missed a bond payment.
Euro
There is a downside risk for the euro as markets are anticipating a hawkish Jean Claude Trichet at the press conference, which will be held after the rate announcement. Investors widely expect Mr Trichet to say that the policy committee is in a position of “vigilance” against inflationary tendencies. In the past, such verbiage has indicated that a rate increase will be voted on at the following month’s MPC meeting.
Japanese yen
The Japanese yen continues to test the resolve of G7 central banks. The yen has been slowly testing higher levels against the US dollar as equity markets decline for what appears to be the seventh day in a row. A revised Q1 GDP figure for Japan was left unchanged and had little impact. As long as equity markets are signalling a ‘risk off’ approach to trade, higher highs should be expected for the yen.
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