The euro is struggling near three-week lows against the US dollar amid concerns a weak new government in Rome could push the Italian economy deeper into recession and inflate the Government’s substantial debt burden. Sterling remains vulnerable and could have further to fall after a dovish Bank of England Quarterly Inflation Report opened up the UK currency to more bets in favour of looser monetary policy. Analysts will study BoE meeting minutes before government borrowing data that could press the pound with concerns about fiscal policy too. The US dollar climbed on evidence the US economy is strengthening and further gains are likely if markets turn risk averse in front of elections in Italy, the eurozone’s third biggest economy.
Sterling
The Bank of England’s Quarterly Inflation Report encouraged markets to ramp up negative sterling bets after Governor Mervyn King took up a very dovish position on monetary policy, promising to boost stimulus measures for the UK economy if required even if high inflation persists. Consequently, the pound is exchanging hands near seven-month and 14-month lows against the US dollar and euro respectively and appears vulnerable to further losses.
US dollar
The US dollar begins the week near seven-month highs against the British pound and one-month peaks on a trade-weighted basis after safety flows and data signalling a stronger US economy led investors towards the US currency. According to official figures, US industrial output fell slightly in January but a separate report covering business and factory activity in the New York region this month jumped to May 2012 highs. The University of Michigan’s measure of US consumer sentiment for February increased more than expected, offering more evidence consistent with a growing economy.
Euro
The euro may struggle to attract buyers with Italian elections looming after reports showed economic recession across the eurozone was much deeper than expected, emphasising concern among European policymakers about the euro’s strength which pulled the single currency down to three-week lows against the US dollar. However, ZEW’s survey of German economic sentiment, a leading indicator for the economy, is forecast to improve further which may encourage investors to buy back the euro. PMI surveys due later in the week are anticipated to paint a similar picture of an economic recovery which could help take the sting out of disappointing growth data, offering another potentially euro-positive scenario.