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Dollar weakness allows sterling to hit new four year high

Today sees the end of the working week ahead of the Easter break.  On reflection it’ll be a week remembered primarily for softening inflation, not only in the UK and the Eurozone but even across the pond in the US.  Yesterday the Federal Reserve Chairman Janet Yellen showed her dovish colours by mentioning that the risk of lower inflation is greater than the risk of higher inflation.  The comments saw the dollar head lower, erasing some of the ground it had made back following the wider losses earlier in April and the move shows once again how the consensus view of expected dollar strength in 2014 is not playing out.  In particular, the dollar weakness allowed sterling to push to the new four year high that it attempted yesterday following the better than expected unemployment data, taking GBPUSD beyond 1.6820.  Yellen’s words do not suggest a change to the Fed’s tapering, just that there’s more chance of it being slowed down, than being sped up.

With falling inflation in the UK earlier this week and yesterday also seeing inflation in the Eurozone come in lower than expected, hitting its lowest level since 2009, the role that Central Banks are playing will continue to dominate the markets with the theme being loose monetary policy is here to stay.  In the case of the ECB however, the debate over QE will continue and until Mario Draghi actually pulls the trigger, the euro is likely to remain underpinned.  Evidence of this was shown yesterday where the single currency barely battered an eyelid in the face of the softer inflation data.

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