With a move downwards in the Pound as large as we have seen in the last few weeks, it is perhaps no surprise that at some point we would see traders begin to take profit, and this seems to be what happened yesterday as Sterling clawed back some of it's recent losses. The bounce isn't based on any positive UK news, as there is none, in fact the CBI actually revised their forecast for the UK economy, with a much deeper and harsher recession predicted, reaching a nadir late in 2009. The markets however, shrugged off this news and started buying the Pound, sending it up to above 1.19 against the Euro, and above 1.50 against the Dollar.
The Dollar itself came under a little bit of pressure as the profit taking wasn't just confined to the Pound. The US economy got some bad news from a manufacturing survey falling further in November, and industrial production lower in October; there was also some bad news from the financial sector as Citigroup announced they were axing 50,000 jobs, and not the 10,000 the markets were predicting yesterday. The Dollar slipped, not only against the Pound, but also against the Euro, although it as recovered to sit around 1.26, and against the AUD falling 2% at one point, but now sitting around 0.6450.
The fall in the outlook of global growth does have some good effects, at least for commodity importing countries, as the price of oil has dropped to around $55/bbl. The price was supported yesterday by the Somali pirates, who have stolen roughly a fifth of Saudi Arabia's daily output contained in that tanker, but the trend still seems to be keeping oil weak, in spite of noises from OPEC members that they wish to cut production further to help support the price.
Today will be dominated, in the UK at least, by the CPI figures. Last month was almost certainly the peak in inflation, with producer prices, and commodity prices retreating in recent months. Inflation is expected to fall today to around 4.7%, which while still above the BoE target, is the first move in the right direction for a while; the problem now is how fast, and how far will it fall. The BoE are worried that it may fall down past their target and get dangerously close to deflation, so a drastic fall in CPI could lead to further increased talk of rate cuts, which are already on the cards, and limit some of Sterling's bounce.
Later on today we have the producer price index for the US, which is likely to follow the downward trend of our own index, as falling commodity prices ease the pressure on prices.
Michael Corcoran | Treasury Solutions | nabCapital