Eurozone sovereign debt issues just won’t go away

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On a day when the data calendar was pretty light, Sterling took advantage of some Euro weakness yesterday following Moody's decision to downgrade Ireland's bonds to "junk" status in an another sign of the persistent concerns surrounding Eurozone sovereign debt. There was also speculation that Greece will be unable to avoid defaulting on it's loan repayments whilst in Finland, the pro-Europe National Coalition is poised to enter government with a Euro-skeptic bloc of parties who believe that Finnish taxpayers shouldn't have helped rescue Greece and Ireland earlier this year. These news releases saw Sterling rise to a ten day high of £/€ 1.1436 against the Euro.

Sterling didn't have such a good day against the US Dollar, falling back towards £/$ 1.6250 as the Ernst & Young Item Club cut its economic growth forecast for the UK this year. The report from Ernst & Young also noted pressure on the Bank of England to raise interest rates had fallen as gross domestic product is expected to only expand by 1.8% instead of the 2.3% forecast in January.

The only peace of UK data yesterday painted a more positive picture of the UK housing market as the Rightmove house price survey showed prices rose for the 4th consecutive month, up 1.7% in April versus 0.8% in March.

Wednesday's release of the minutes from the Bank of England's last monetary policy committee meeting now come into focus. It seems that the markets have reduced their expectations of a interest rate raise in May after the unexpected fall in UK inflation last week and continual concerns over the economic growth outlook.

The markets were anticipating an interest rate rise in May however, because of the recent data and shift in sentiment, Sterling will get a boost if the minutes of the meeting show a 5-4 voting split. Sterling may also gain against the Euro as a perceived safe haven from Euro debt stresses.

Speculation surrounding UK monetary policy and the potential for a rate increase will continue to influence Sterling, particularly considering the lack of economic data released this week.