Currency Update

The ECB seem determined to raise rates at least once to control inflation, in spite of a lower than expected IFO business Climate survey, which fell to it’s lowest level since 2005 and showed German expectations also falling to a 3 year low. German consumer confidence is also down and the final PMI survey for the Eurozone shows a contraction in activity, the first since July 2003. However the PMI survey also shows inflationary pressures mounting, with prices in the service sector rising the fastest for more than 7 years. The lower activity is based upon the usual global conditions, high fuel and food prices, but also on the continued strength of the Euro. Even with yesterday’s broadly negative Eurozone data, the Euro still sits above 1.5550 against the Dollar and has kept the Pound down below 1.2650 against the Euro.

The Pound was struggling with it’s own continuing problems in the housing sector, with yesterday’s house price survey showing a further dip downwards, and today figures showing that mortgage approvals are down over 50% from the same time last year. The Bank of England are facing the same problems as the ECB, with a slowing economy and rising inflation, of course with inflation having the same cause in both the Eurozone and the UK, you would expect the two central banks to have roughly the same strategy to cope with it, and mostly they do. Both are waiting for the jump in food and fuel prices to roll out of the annual CPI figures, and both are fighting to keep inflationary expectations down to stop a wage/price spiral. The ECB are going to raise rates to control expectations, whereas any further rise in rates in the UK could tip the balance of the economy into recession, so the BoE are instead talking tough on inflation but are unlikely to raise rates to combat it.

It will be interesting to see if the government back up the BoE in the upcoming wage dispute with local council officials, the unions asked for a 6% rise, but have been offered 2.4% and are likely to go on strike to back up their claim. If the government do agree to higher wage demands it will weaken the case, made in the mansion house speech last week, for the private sector to contain wages to stop an inflationary spiral. Of course the 14% wage rise for the fuel hauliers doesn’t help the government’s negotiations, but as the council officials can’t hold the fuel supply hostage, this dispute is likely to go on for a while longer.

There is no data out today for the either the UK or the Eurozone so the attention will be (even more) firmly on the US. WE have a couple of consumer confidence figures out, a regional manufacturing survey, and more housing data. The housing data is likely to show an acceleration in the fall of prices, down 16% annually, with the consumer confidence and manufacturing index also expected to show drops. The markets are still expecting a rate rise sometime this year, but with the presidential election in November, the timing is likely to prove too problematic.