The British pound fell sharply, surrendering recent gains against the euro ahead of British consumer price inflation data which is expected to further cloud Britain’s economic outlook. The euro snapped out of last week’s slump following strong comments from the head of Germany’s central bank while the US dollar headed lower after investors reacted to dovish remarks from one Federal Reserve member. Trading activity in currency markets was fairly choppy as traders reacted to reports that the G7, a group of the world’s leading industrialised nations, was preparing to release a statement addressing fears of a global currency war.
Sterling
The British pound retreated, shedding a decent portion of its rally from last week as traders sold the currency before inflation data that is expected to show prices rising at a time where the UK economy is struggling to grow. Consumer price inflation is forecast to have picked up, adding to an uncertain economic environment which the Bank of England is expected to highlight in its quarterly inflation report. Sterling also weakened sharply against the euro after comments from a member of the European Central Bank reduced worries that eurozone officials were becoming alarmed with the single currency’s rapid advance this year.
US dollar
US President Barack Obama will deliver his State of the Union address and markets are anticipating new information about the Government’s position on the economy and fiscal policy. The safe haven US dollar could surrender its recent advantage against the euro and British pound should Obama offer investors hope that US deficit reduction plans will not derail efforts to accelerate US economic growth. The greenback after the Federal Reserve’s Janet Yellen suggested US interest rates will remain close to zero even after the Fed achieves its unemployment target, encouraging traders to use the US dollar as a long-term funding currency for riskier investments.
Euro
The euro may quickly shake-off its post-European Central Bank fall after the head of Germany’s central bank, Jens Weidmann, said that the euro is not overvalued and governments should not attempt to weaken the currency. ECB President Mario Draghi last week suggested policymakers were monitoring the single currency’s exchange rate which hit investor confidence in accumulating too much of the currency. However, remarks from Weidmann, who is also a member of the ECB, eased concerns that Europe’s central bank could eventually look to limit the euro’s strength which could harm the region’s economic recovery.