Currecy Update – Tuesday 15th June

Currecy Update – Tuesday 15th June

Yesterday's OBR report provided some surprise, as although the growth figures were cut as expected, although even then only to 2.6% (still on the optimistic side), the borrowing figures were also cut, which is good news for finances and for the UK's sovereign rating. Of course the figures do still pose a serious problem, and the government haven't let up on the tough talk ahead of the budget in a weeks time. The reasonably good news from the OBR was on top of the weekend's comments from the MPC member in which he seemed to suggest that rates may have to rise in the 2nd half of this year if inflation doesn't start to moderate. The MPC have been keeping to their line that inflation is above target only on a temporary basis, and many factors, such as the VAT rise and the weak Pound, are contributing to this and would start to abate soon, leaving inflation under target. However inflation has been above target for many months now, and the expectations for temporary inflation are starting to get stretched. We have the latest CPI data out today and there is no chance that it will come under target, so the problems are likely to continue for another month.

The Pound gained some support from the OBR report, and has managed to keep above 1.47 into this morning. Sterling has also managed to make some modest gains against the single currency, pushing up towards 1.21 even as the Euro itself benefited from some decent economic data. Yesterday's Eurozone industrial production data came in at decent 0.8% rise on the month, much higher than the 0.5% expected, and there was further good news as Spain's finance minister denied that they would have to seek external funding to manage their deficit. A lot of the good feeling was wiped out as Moody's followed other credit rating agencies and downgraded Greece's credit rating to junk status, which had the effect of not just halting the Euro's recovery, keeping it under 1.22 against the Dollar, but also knocking US stock markets which after rallying 1.5% mid session, actually finished slightly lower than it opened.

The latest downgrade to Greece's credit has dampened investor appetite a little, however the Euro has not suffered too much and by now no-one should be surprised by just how bad things are in Greece. Another mitigating factor is the comments from the Fed member Bullard yesterday, who predicted that Europe's debt problems wouldn't derail the global recovery with Asia, and the US growing strongly. Of course he didn't say that the Eurozone problems would be a problem for the Eurozone countries, just that the rest of the world should be able to shrug it off, and as most of our trade is with the European mainland, even a weaker Pound may not be enough to help stimulate growth as we head into a severe period of cuts in public spending.

We get the latest look at the state of UK inflation today with the CPI release. The numbers are expected to moderate a bit, and there are some indication that it may drop by more than expected, if it follows on from the PPI measure last week. However even a decent drop will leave it above target, and it will take a few month's of consecutive falls before the BoE can slap themselves on the back and congratulate themselves on their accurate forecasting. Later today we get the ZEW survey out of Germany, and a manufacturing survey out of the US, both of which will play their part in shaping investor appetite, however for Sterling it is the CPI figure which will give shape to the day, and the risks are more to the downside for Sterling than the opposite, although inflation does have a nasty habit of surprising the markets.

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