Currency Update

Currency Update

It was a bad day for the Pound yesterday as the inflation figures showed prices rising by 3.3%, caused, of course, by spikes in food and fuel prices. This would normally increase the expectation of rate hikes as the central bank fights to control inflation, however the note that Mervyn has had to write to the Chancellor as inflation rose over 3%, and the Chancellor's reply has quashed any idea of a rate hike this year. Mervyn pointed to details in the BoE's remit that 'the framework takes into account that any economy at some point can suffer from external events or temporary difficulties, often beyond it's control. The framework is based on the recognition that the actual inflation rate will on occasions depart from its target as a result of shocks and disturbances.'. This is of course exactly what has happened, as Mervyn pointed out, global agricultural prices have risen 60%, oil has risen 80%, and the wholesale gas market has risen 160%. Mervyn's note makes clear that any rise in UK interest rates are not going to effect these global price rises, and 'the result would be unnecessary volatility in output and employment.', which are code words for a recession.

The net result of the inflation figures and the BoE's letters, was to send the Pound down to around 1.95 against the Dollar, and 1.26 against the Euro, as the markets removed any expectations they had of a rate rise this year. The expectations of rate rises had already been removed from the Dollar on Monday causing it's weak showing at the start of the week.    

The reversal of expectations in the UK and US is in sharp contrast to the ECB, who have indicated that a rate rise in July is more than likely. Although inflation in the Eurozone is caused by the same global factors as elsewhere, the ECB are determined to control inflationary expectations and stop a wage/price spiral. However a recent series of comments that a July rate hike would be a one off, was continued yesterday with ECB member Bini Smaghi indicated that one rate rise would be enough to bring inflation below 2%, although I'm not too sure how he thinks this will bring down food and fuel prices. His comments coupled with a record weak German ZEW survey, it showed investor sentiment falling to a 15 year low, caused the Euro to fall below 1.55 in spite of a weakening Dollar.

After the excitement of yesterday's inflation data we have the MPC minutes from the last meeting released today. With Mervyn's note stating clearly what the MPC's outlook is for inflation, the minutes have lost some of their relevance. We do also have the CBI Industrial trends survey which is expected to dip even further from last months poor showing which could again weigh on the Pound.

Apart from the brief UK news there is little else to excite the markets; there are more speeches from ECB and US Fed members but unless they deviate from the party line already set up by a number of previous speeches, then neither is likely to give the markets much pause for though.

No Comments

Post a Comment