FX markets in limbo ahead of Thursday’s interest rate decisions

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The foreign currency exchange markets traded in fairly tight ranges yesterday, suggesting that investors are yet to be convinced over any further moves. Uncertainty over increases in interest rates in the UK and the Eurozone, coupled with inflation expectations have resulted in the currencies being finely poised ahead of rate decisions on Thursday.

Yesterday, the trend of selling the US Dollar stalled whilst Euro gains against Sterling have become harder and harder to sustain, probably die to Eurozone sovereign debt issues continuing. Sterling is being held back as higher inflation threatens to undermine growth. All in all, Thursdays interest rates decisions from the ECB and BoE are going to be closely watched.

Yesterday's UK construction PMI fell marginally to 56.4 in March from 56.5 in February but came in above the consensus forecast of 54.8, sending the 3-month average to 55.5 which is the highest since July 2010. In the Eurozone, producer prices rose 0.8% in February, leading the annual pace of producer prices higher to 6.6%, contributing to higher inflation.

Today's March services PMI surveys from the Eurozone and UK, and the US non-manufacturing ISM, are likely to point to robust performances in the Eurozone and the US, but a far more subdued UK non-retail services sector. Any positive number from the UK services PMI will help Sterling as the likelihood of an interest rate hike in May will grow.