Currency Update

In a busy week for data releases, the UK has had industrial production figures, much weaker than expected, a house price survey, which again showed further drops in value, and yesterday it was retail inflation numbers and the trade balance figures to disappoint. The BRC retail price survey showed a further rise in prices with food prices jumping quickly, but the usual discounting also seems to have stopped in non-food items, all of which points to CPI ticking up in June. The trade balance figures were also poor viewing, with the expected fall in the deficit due to the weak Pound not really evident; in fact taking services into account the deficit actually widened. The series of weak data would normally lead the BoE to think about dropping interest rates, but the devil is in the price rises, and with inflation at 3.3%, June’s could tick up to 3.4%, then today’s decision is certain to be for no change.

In spite of the weak UK data the Pound still rose over a cent against the Dollar yesterday, briefly climbing above 1.98 overnight, before dropping back. The spark for this move was weakness in the Dollar rather than anything the Pound has done. The tensions between Iran and Israel (there were rumours that Israel was prepared to strike suspected Iranian nuclear enrichment sites and Iran tested some missiles yesterday that would mean that Israel is within reach), have pushed up the price of oil, and weakened the Dollar. The Euro climbed back above 1.57 against the Dollar even though the Eurozone’s first quarter GDP was revised down slightly in the final reading to 0.7%.

With interest rates relatively low in most of the industrial world and commodity prices rising fast, Australia’s high interest rates and commodity based economy have seen the Aussie dollar boom. The Australian economy has been supported by the rise in commodity prices, but it looks like no economy can avoid the global slowdown for ever, and there have been some weaker signs out of the antipodes. Overnight an Australian consumer sentiment survey fell to a 16 year low, and there was a fourth consecutive fall in housing to further worry the markets. The AUD has not really suffered too much, still sitting around 2.06 against the Pound, and 0.96 against the Dollar, but if there are any further signs of weakening employment or a reduction in inflation, then the Aussie Dollar will suffer.

Today we get the MPC decision, if inflation was not a problem then there is no doubt that the state of the economy warrants lower rates, but of course inflation is a concern. The Reuters poll of economist’s expectations pointed to a unanimous 74 votes for no change, and without the statement the Fed release, or the press conference like the ECB hold, we will have to wait two weeks until the minutes are released to gain any insight into the MPC’s thinking.