Currency Update

The drastic uplift in the CPI figure yesterday only gave the Pound brief support before the markets started to consider the long term view and decided that rising inflation with a slowing economy were not going to give the Pound strength. Already I’ve heard two different news sources this morning raise the spectre of stagflation, although of course inflation (at least the official measure of inflation) is nowhere near the levels it hit in the 70’s, when the previous economic model that considered inflation and unemployment to have an inverse relationship broke down. As in the 70’s the rises to inflation come from global rises in commodity prices, but whereas Oil (and OPEC) was the problem in the past, it is the price of food, as well as oil, which has driven the recent rise to 3%. The inflation level has lessened the expectations of a rate cut next month, but this has offered little to the Pound which has stayed weak below 1.26 against the Euro.    

The Pound has fallen even further against the Dollar (down to around 1.94) as there was some better data out from the US, plus plenty of Fed speakers saying that they think they’ve done enough to stave off the worst of the economic downturn (including a $600 give-away by the US government, not something the UK government would ever do as they prefer to give direct cash handouts for political rather than economic expediency.) The US retail sales showed a surprise rise, which, although the figures were made more messy by the timing of Easter, has raised the levels of optimism. The Fed’s talk of inflation risks has even started thoughts over when the next rate rise will be, with some targeting the end of the year.

Inflation is again on centre stage today, as we have the BoE’s Quarterly inflation report, which will be examined even closer than normal to try to gleam some idea of what the BoE thinks medium term inflation is likely to be, and just where they see rates going. The report may soften it’s hawkish tone from previous quarters, with the expectation that a slowing economy will help drag inflation down in the medium term, although no matter how much the UK economy slows, it’s not going to have much effect on global food and oil prices.

We also have CPI figures out for the US, which also have a bit more relevance than normal due to the rising frequency with which Fed members mention the risks to inflation. However the US seem much more comfortable with their inflationary pressures, CPI is expected to stay around 4% today, but any shock rise could see the expectations of a rate hike slightly raised, although the end of the year would still seem the earliest it would be considered.