Analysis / Daily / Finance / forex / Money

Sterling inches higher against euro after construction report

Sterling inched into positive territory yesterday versus the euro after a survey of construction managers came in slightly better than expected, reinforcing a generally brighter economic start to a year that also features political uncertainty. Already robust growth in the industry jumped to a four-month high in February, the data showed, although building firms hired staff at the slowest pace in more than a year. Sterling climbed to 1.3807 against the euro this morning, within sight of a seven-year high of 1.3822 struck on Monday.  Sterling has been the strongest performer of the G10 group of developed world currencies over the past month, fuelled by a revival of expectations for a rise in interest rates within the next year. But it also faces the prospect of a poll in May that, highly unusual in British politics, could see half a dozen different parties have an influence on the shape of the next government. Benchmark 10-year gilt yields, which were more than 500 basis points below their Italian peers during Europe’s debt crisis, have climbed from a record low set in January as investors brought forward bets on an interest-rate increase.

The euro remained under pressure as investors turned their attention to the upcoming ECB meeting tomorrow, when it was expected to announce details of its quantitative easing program, which is due to start this month. EUR/USD was at five-week lows of 1.1130, testing the 12-year low 1.1098 (previously saw on 25 January) as investors looked ahead to a updated batch of U.S. economic reports. The European Central Bank’s quantitative easing programme announced in January has been well received by financial markets. Its size (€60bn a month) and open-endedness have positively surprised. The fact that 80 per cent of the bond purchases will not be subject to loss sharing between national central banks has rightly been seen as the price worth paying to get a bigger programme and a wider consensus within the ECB governing council. Indeed, this so-called risk-sharing issue has been overemphasised since all the monetary claims created by the programme will remain a joint and several liability of the eurosystem, whatever the loss-sharing arrangement on asset holdings. Having said that, the ECB is now close to running out of ammunition. The true constraints on further ECB intervention lie in the 25 per cent issue limit and 33 per cent issuer limit on its sovereign bond purchases.

The dollar was steady against the euro and the yen on Wednesday as investors looked ahead to a fresh batch of U.S. economic reports and a European Central Bank meeting for further indications on the direction of monetary policy. The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, was steady at 95.50, not far from 11-year peaks. The dollar has strengthened so far this year as upbeat economic data indicated that the economic recovery was on track, supporting expectations for higher interest rates. The U.S. was to release survey data on service sector activity and a report on private sector jobs growth later today, ahead of Friday’s nonfarm payrolls report.

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