Currency markets are trading on the outlook for interest rate differentials. The Japanese yen is suffering most as investors face the Bank of Japan’s two-day policy meeting, which got underway. The central bank is expected to indicate that it will support the financial system with as much liquidity as needed, while revising down its economic growth outlook. The loose monetary policy outlook in Japan is weighing on the currency, as it is the US dollar. Sterling saw gains on the back of a PMI service sector survey, which rose to 13-month highs while the euro continues to find support against the Swiss franc, yen and dollar in front of the European Central Bank meeting, where markets widely expect an interest rate increase of 25 basis points.

Sterling

Sterling traded sharply higher against the euro taking back all of its losses seen last week. The move came after the release of the CIPS PMI services sector survey that rose to levels not seen in 13 months. The index pointed to stronger economic growth in the first quarter of this year and will support arguments for a potential rate increase at the Bank of England.

US dollar

The US dollar opens lower as the greenback continues to face selling pressure despite the announced raise in Chinese interest rates. Traditionally, a rise in Chinese rates would call into question the strength of the global economic recovery and send investors into the safe haven US dollar. This has not occurred. The dollar is losing its safe haven status at the moment for two reasons: the outlook for fiscal and monetary policy.

Euro

The euro continues to make gains going into what investors see as a certain rate increase at the MPC meeting. Upward revisions to the PMI service sector survey helped to confirm this outlook, while retail sales figures throughout the euro area remain soft. Weak consumer demand comes as no surprise to investors, but it will not bode well for the eurozone’s growth outlook.

Japanese yen

The Japanese yen is facing heavy selling pressure as investors look forward to the outcome of the Bank of Japan’s two-day meeting. The yen opens at seven-month lows against the US dollar, 11-month lows against the euro and sterling. Investors are using the yen to fund carry trades because the outlook for a loose monetary policy in Japan for many years is expected to remain in place as the country recovers from the disaster.

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

Sign up to our free newsletters

Get the best updates straight to your inbox:
Please select at least one mailing list.

You can unsubscribe at any time by clicking the link in the footer of our emails. We use Mailchimp as our marketing platform. By subscribing, you acknowledge that your information will be transferred to Mailchimp for processing.