Wednesday, 15 December 2010

Sterling falls vs Euro and US Dollar despite high inflation

15th December 2010
Good morning. The pound fell again yesterday against both the Euro and US Dollar. UK Inflation came in higher than expected, and investors took profits on a strong pound, and the sell off caused weakness for Sterling. At 08:30am this morning rates are as follows:
  • GBP/EUR 1.1806
  • GBP/USD 1.5736
  • GBP/AUD 1.5848
  • GBP/NZD 2.1009
  • GBP/CAD 1.5847
  • GBP/CHF 1.5118
  • GBP/ZAR 10.748
  • GBP/JPY 132.10
  • GBP/HUF 324.18
  • EUR/USD 1.3330

UK Inflation rises; interest rates to rise?

Inflation rose to a 6 month high in November, figures showed yesterday. This is the latest surprisingly good economic figures for the UK, and initially it strengthened the pound as it dented lingering hopes of further monetary easing by the Bank of England.

Andrew Sentance, the most hawkish member of the Bank's Monetary Policy Committee, said the data strengthened his view that interest rates should rise now. "I think we would reinforce our credibility by gradually moving interest rates upwards," Sentance said. Usually higher interest rates lead to a stronger currency.

Bank Deputy Governor Charles Bean that policymakers were watching price pressures "like hawks" and admitted inflation had been above target for an uncomfortably long time.

However the Bank has already acknowledged that inflation will stay above 3 percent all next year, and analysts said the latest data will not change the policy of keeping rates low.

"The Monetary Policy Committee is unlikely to respond to this surprise," said Barclays Capital economist Fabio Fois. "The committee has nailed its colours to the mast: it views the current high rate of inflation as temporary."

So, despite the higher inflation it looks unlikely that the BoE will push rates up. Due to this the pound then retreated back, as investors pondered the likelihood of further Quantitative Easing.

Summary

So it's a weak Euro that has been pushing exchange rates higher, and despite a run of good UK data the pound has actually fallen back away, highlighting the uncertainty surrounding the economic recovery in Britain. Markets will soon slow as we approach the Christmas break, and often when trade is thin economic data can have an even stronger effect on exchange rates than usual.

Today's Data

UK data is all out at 09:30am; Unemployment figures and Jobless claims. The figures measure unemployment and are an indicator how the economy is performing. We also have employment figures from the EU today. From the US we have inflation data and Industrial production figures.

We expect the claimant count for the UK to be 4.5% and total unemployment at around 7.7%. Watch the 09:30 figures, and if the numbers are bigger than this, expect the pound to drop quite quickly. Of course better figures could provide some support for Sterling.

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