The British pound weakened towards the level of $1.38, oscillating around the lowest level since mid-February. The reason may have been Bank of England Governor Andrew Bailey's statement that the UK economy will contract by 4% in the first quarter of this year compared to the same period in 2020 and by 19% compared to the first three months of 2019.
Bailey also warned of the negative impact of negative real interest rates on business savings and investment. The Bank of England governor also said that inflation will remain below the 2 percent target but will temporarily rise due to public support measures.
The pound recently seemed to be supported by hopes of a faster economic recovery in the UK due to the success of the vaccination rollout program combined with massive fiscal and monetary stimulus packages. Investors expect officials to signal increased bond buying by the central bank at Thursday's Bank of England meeting.
Today, European stock market sentiment may have been improved by the ZEW economic sentiment indicator reading for the Eurozone. It rose 4.4 points to 74 in March 2021, the highest reading since February 2004. In March, 79.4 percent of analysts surveyed expected economic activity to improve, while 5.4 percent expected it to deteriorate and 15.2 percent expected no change. Moreover, the index for assessment of the current economic situation in the Eurozone increased by 4.8 points - to minus 69.8 points, and inflation expectations rose by 8.8 points, to 80.6 points.
In addition to the aforementioned ZEW reading, European stock markets appear to have risen on Tuesday, making up for small losses from Monday, as investors around the world await the outcome of the Federal Reserve meeting that begins today. The market seems to want to hear whether the US central bank will take any action to lower bond yields. Meanwhile, EU leaders reaffirmed their commitment to support the economy during the COVID-19 crisis and agreed on the need to maintain a fiscal stance in 2021 and 2022 that will pave the way for recovery.
The Fed through its stance on the debt market situation could also affect many other markets. On the currency market, the most vulnerable pair seems to be USD/JPY, whose rate rose very quickly from the level of 102.60 to 109.20. It seems that the fall in yields could contribute to a correction on this pair. In turn, the gold market could react positively. The price of an ounce has fallen from over $2,000 below $1,700 in recent months. Falling bond yields along with rising inflation expectations could be positive for gold.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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