Euro rebounds after comment from ECB member

After a rocky start to Friday’s trading, the dollar has regained its poise and is flitting between gains and losses against a basket of currencies on the session. The greenback had lost some appeal throughout the week following a steadfast showing from the central bank where it appears there is little chance that monetary policy is about to be changed. Global tensions dimmed after the Egyptian overthrow of its President while there was little further safe haven demand for the dollar as tensions slowly spread across the Arab world. Much of the driving action later in the week has come from Europe where investors keep on picking at the stitches in monetary policy hoping that they might soon be able to tear it apart at the seams.

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British pound – Attracting much of the spotlight this week was the pound sterling where investors have been clamoring for signs that the Bank of England would soon raise interest rates. Inflation rose to twice its permitted ceiling causing the Governor to write a fifth open letter to the Chancellor explaining why this is the case and what he intends to do about it. Despite internal policy dissent from external MPC members the central bank sounded off loud and clear that it sees no need to risk negatively impact growth in order to address a rising cost of living that it deems temporary and driven by beastly rising commodity prices. In an unexpected twist to finish the week weather-weary consumers drove retail sales back from the winter doldrums to the strongest advance since February 2010. While sales excluding cars and fuel surged by 1.6% and far faster than a 0.5% forecast, the series was revised far lower for the previous month, but investors were still taken aback by the ferocity of the rebound. The pound jumped sharply to reach $1.6231 for its highest in at least two weeks as investors began to sense that there may be room for monetary tightening after all.

Euro – The euro was having a bad hair day on account of an uncomfortable surge in German producer price costs, which rose by twice as much as forecast. The January index rose by 1.2% lifting the year-on-year gain for factory input costs at 5.7% and up from 5.4% in December. And while investors have been incredibly sensitive to signs that simmering inflation might spark a response from the ECB, more recently they have been told to lay down their pitchforks and relax. The ECB like several other central banks observes that the global rebound is dragging commodity prices higher and that over time this trend will dissipate. Yet there were two pieces of news that weighed on sentiment towards the euro this morning. First, French business confidence for February unexpectedly stumbled to an index of 106 from 108 despite expectations of an advance. This is one of a few recent signs that buoyancy in the region is petering out. Second, data from the ECB showed that banks remain heavily reliant on borrowing from the central bank. Borrowing at the marginal lending facility on Thursday rose to €16 billion and is the highest since June 2009. So despite concerns over inflation the rising price profile investors rounded on the euro in the belief that all is not well and that the simmering sovereign debt issues might yet weigh upon its appeal. However, just to illustrate the fickle and fluid nature of this market it was a recent headline flashing across dealers’ screens that sent the euro sharply higher after ECB member Bini Smaghi warned that the central bank might raise rates if price pressures mount. The euro reversed a daily loss to $1.3550 to reach a session high at $1.3619.

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