Currency Update

After the prospects for the UK economy took a battering from a string of bad inflation figures, it is hard to look at the week ahead without some trepidation. At the beginning of last week we had the Producer Prices, which showed growing inflationary pressures at the factory gate, then on Tuesday we found that those pressures had already got through to the high street has CPI hit 3%. To finish off the inflation data we had the Quarterly Inflation report, which was much more pessimistic than many expected, predicting that inflation would be above 2% for the next 2 years, and could be above 3% for a number of consecutive quarters. Although the news makes rates cuts very unlikely, it still weighed on the Pound as higher inflation undermines the UK’s growth. It is also true that as the current bout of inflation is caused by global fuel and commodity prices the BoE’s one tool of control, interest rates, is less effective as no matter how high UK rates are set it’s not going to make a dent on global fuel prices.

Early, very early, this morning we had the release of the Rightmove house price survey which showed a surprising rise, with house prices up 1.2% on the month, but the rise is more likely to be due to seasonal factors, with the stock levels still rising over the month, demand and credit is likely to shrink, so this is a small blip on what will be a continuing downward spiral.

The Pound weakened on the back of the bad week, but did stage a recovery against the US Dollar on Friday as consumer confidence figures took a surprisingly bad nose dive falling to it’s lowest level in 28 years. The US had it’s own inflation figures last week and the benign numbers, plus the continuing weakness in the housing market, have lessened the prospects of a rate rise sometime this year, which has weighed on the Dollar, allowing the Euro to rise up towards 1.56, and the Pound towards 1.96, against the Dollar.

All the UK data from last week was at the front end, this week it’s at the back with nothing out until Wednesday; however on Wednesday we do get retail sales and the BoE Minutes from the last meeting, both of which will give us a clearer idea of where the economy and interest rates are heading, and neither is likely to be good news. There is little released today as traders ease themselves into the start of the week.

Michael Corcoran – Assistant Manager |Treasury Solutions | nabCapital™ | A division of National Australia Bank Limited