Hopes of more central bank stimulus drove currency markets forward while signs of political stability in Italy, the eurozone’s third biggest economy, also helped encourage traders into more risky assets. Equities gained and the US dollar fell towards a two-week low on a trade-weighted basis after weak US inflation data underlined views that the Federal Reserve will end its two-day policy meeting with a firm commitment to its long-term bond-buying plan. With positive first quarter UK economic growth under its belt, the pound made a solid start but was unable to match currencies offering better yields such as the Australian dollar and Polish zloty. Sterling also slipped against the euro despite the likelihood that eurozone inflation data will seal the case for a European Central Bank rate cut. The euro and risk sentiment was propped up and may continue as relief following the formation of Italy’s new Government drove Rome’s borrowing costs down to multi-year lows. The single currency may find its upside limited though from German retail sales data and eurozone inflation figures.
Sterling
Underpinned by last week’s positive UK economic growth data, sterling made a bright start to trading but ended lower after risk-friendly session saw the pound slowly lose out to its more interest-heavy rivals such as the Australian and New Zealand dollars. Currencies were mostly driven by ongoing hopes of more stimulus from the world’s major central banks. Although Britain escaping recession in Q1 may keep the Bank of England’s quantitative easing scheme on hold for now, markets believe central banks in the US and Japan will continue to print money and the European Central Bank to cut rates.
US dollar
US dollar bulls are slowly disappearing, pulling the currency’s trade-weighted value towards a two-week low after weak US inflation data underlined worries about Federal Reserve monetary policy ahead of the decision. The US dollar’s retreat suggests investors feel that while disappointing first quarter US economic growth has reinforced the case for the Fed not to take its foot off the gas on stimulus, inflation data implies that it does not have to either as prices fall.
Euro
Supported by signs of political stability in Europe, the euro rose to one-week highs against the US dollar and the single currency may hold onto those gains ahead of the Federal Reserve monetary policy announcement. Italy finally put together a Government over the weekend under new Prime Minister Enrico Letta, ending speculation since inconclusive results in February that fresh elections would revive pressure on Italian Government debt. Instead, markets reacted confidently to Letta’s new Government, driving down Rome’s international borrowing costs to their lowest since 2010.