Currency Update

We’ve had producer price inflation, CPI figures, and the BoE’s inflation report this week, and what a depressing picture they all paint of the UK economy. On Monday we saw that producer prices jumped to a record high, Tuesday saw a spike in inflation to 3%, and yesterday’s quarterly inflation report was the most pessimistic of all the releases, indicating that the BoE is looking at a slowing economy and high inflation; indeed the report is so pessimistic that they think that we may well get a quarter or two of negative growth, even with inflation consistently above 3% and it could reach a high above 4%. Governor King thought that the spike in inflation is caused not just by high oil, and food prices, but is also exacerbated by the fall in the Pound which has increased import prices. With home energy costs likely to continue to increase, by 15% according to Mervyn, and global food prices unlikely to drop away inflation could be with us for a while.

The economic picture was made even more gloomy by unemployment data showing a rise for the third consecutive month, and even though the inflation report seemed to indicate that the Bank of England were not going to cut rates anytime soon, the FT reports no cuts for two years, it still gave the Pound no support. The Pound has fallen below 1.95 against the USD, and is sitting around 1.2550.
against the Euro.

The Australian Dollar has fallen on the back of weaker commodity prices (copper down 1.3%, Nickel fell 1.9%), and a broad advance of the US Dollar on the back of greater optimism in the US economy. The AUD has fallen below 0.94 against the USD, and in spite of the economic troubles in the UK the Pound has climbed to around 2.08 against the Aussie Dollar. The expectations for an AUD rate hike have been curtailed in the last few days, with a series of weaker economic reports, the most recent of which is signs of moderate wage growth, which is good for the economy as a whole, but lessens the pressures on inflation, and the needs for further.

With the exceptional gloom to the economic reports coming out of the UK so far this week, it is a relief that we have no more data releases due until next week. We do however have plenty for the US, with industrial production, jobless claims, as well as a couple of regional surveys. With Fed now paused and waiting to see when there drastic rate cuts will start to take effect, it would take some pretty negative numbers to seriously hurt the rising optimism in the US.
Later this morning we have Eurozone GDP figures for the first quarter a lower than expected result, consensus is for 0.5% qoq rise, could see the Euro suffer particularly against the USD if this afternoons US reports some in less than disastrous.