The pound depreciated the most in more than four years against the dollar in the past week, amid speculation the Bank of England was moving toward higher interest rates far slower than the Federal Reserve. Sterling dropped for the first time in six weeks as the UK central bank kept borrowing costs at a record low, marking six years with a 0.5% rate. The biggest losses came on Friday, as a US jobs report exceeded economists’ forecasts and strengthened bets the Fed will tighten monetary policy. UK two-year government bonds posted the longest run of weekly declines in eight months as investors still see the BOE becoming the second major central bank to raise rates. Investors are currently fully pricing a 25 basis-point increase in UK borrowing costs by February 2016, compared with April as recently as Monday, according to MPC-dated forward Sonia fixings data provided by ICAP Plc. That assumes the current four basis-point spread for Sonia fixings below the bank rate would return to zero once the BOE raises rates. Cable closed in NY Friday at $1.5037, after rate had been pressed to lows of $1.5032 as the dollar gained a major boost from the release of better than forecast US employment data with analysts bringing in their calls for a potential US rate hike.
The euro slid to $1.0822 in todays Asian session, surpassing Friday’s trough to reach lows not seen since September 2003. The euro’s value against the dollar keeps dropping, and it could soon reach parity with the dollar for the first time in 13 years. The European single currency has been on the slide since May, when it traded as high as $1.40, while the dollar has been rising across a range of currencies. Further weakening of the euro could be expected as today is the launch of the Eurozone’s long-awaited quantitative easing programme, as the European Central Bank (ECB) starts buying back €1trn (£720bn) worth of bonds from the bloc’s member states. The scheme, which aims to boost Europe’s economy, was finalised on Thursday, with ECB President Mario Draghi citing the success of similar programmes launched by the Bank of England and US Federal Reserve six years ago. The ECB will electronically create new money, and use this to buy bonds from financial institutions such as banks and pension funds in the Eurozone member states.
An effervescent US jobs data report gave fresh support for the US dollar. The hotly anticipated data proved to be the standout moment at the end of a turbulent week in the Forex markets. The report showed that Uncle Sam added 295,000 jobs in February, a metric comfortably ahead of expectations. Currency analysts also paid attention to US wage growth, which at 0.1 per cent was below the expected increase. But this however had little impact on trading the euro-dollar pair with the greenback extending gains over the beleaguered single currency, moving down through to the psychologically significant level of $1.10 on Thursday to $1.0875 after the jobs data. All of this rosy data intensified speculation that the Federal Reserve will bite the bullet and raise interest rates in the summer. Some analysts, however cautioned that there is more to see than the headlines suggest, with the quality of jobs gained mainly in low paying service jobs.