Currency Update

Currency Update

It's the time of the month for inflation data, on Friday we had data from the US, showing a rise to above 4%, yesterday we had data from the Eurozone showing a rise to 3.7%, and today it is the turn of the UK, with inflation sitting on the cusp of the top of the 1%-3% range, Mervyn King should be already working on writing the open letter to the Treasury. Last Friday's jump in CPI hasn't helped the Dollar this week as articles in the Financial Times, and the Wall Street Journal report that the Fed are unwilling to take US interest rates higher as they consider a slowdown in growth a more important risk than what is seen as a temporary blip in Inflation; this is in sharp contrast to the mood of the ECB, with yesterday's rise in inflation all but confirming the threatened rate hike in July will happen. The rate hike is likely to be a one off, intended to reassure the markets that inflation is being taken seriously and to stop a wage/price spiral before it happens.

The US Fed may be wise to concentrate on slowing growth as there was yet more data out of the US economy showing a slowing manufacturing sector, and a continuing decline in the housing sector. The  inverse correlation between Oil and The Dollar also continued as the weakening Dollar was matched by a rise in the price of Oil to almost $140 per barrel, shrugging off plans by Saudi Arabia to boost production. There are many different reasons given for the meteoric rise in the price of oil, the weakness of the Dollar, speculation, greater demand from some of the faster developing nations, and also rumours that some nations are actually stockpiling Oil.

The reports about the Fed in the paper, the weaker manufacturing survey, and the Euro inflation reversed the trend of last week, sending the Euro back to around 1.55 against the Dollar. The Dollar also weakened against the Pound bringing the rate back towards 1.97, as the Pound was given support by news that Barclays are following the trend of raising capital from existing investors. Given the UK's reliance on the financial sector, good news for banking gives the Pound support. The Pound also rose against the Euro, up to around 1.27.

Of course the big data release today, for the UK at least, is our inflation figures. These are expected to spike above 3%, to around 3.2%, but has actually posted at 3.3%, necessitating an open letter to the chancellor. The Letter will be posted on their website at 10:30 today, and has to include the reasons for the rise, commodity prices, how long will inflation remain outside the target range (expected to be a temporary albeit lengthy blip), and what the BoE intend to do about it (very little). In many ways the recent rise in inflation, arising as it does from external factors, is invulnerable to the central banks toolkit, no matter how high UK interest rates go, it won't effect the price of oil. The rise in food and fuel prices represent more an adjustment for the whole economy, than the traditional idea of inflation, being pressures from too much money chasing too few goods. The BoE do have a job in making sure that the spike in commodity prices doesn't start a longer term inflationary surge.

The rise in inflation was mostly expected, so hasn't effected the Pound, however Mervyn's note to the Chancellor, and particularly what the BoE are going to do about inflation does have the potential to change the outlook.

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