Thursday, 27 January 2011

Sterling gains on BoE MPC Minutes

27th January 2011
Good morning. After big falls on Tuesday due to lower GDP, Sterling gained slightly yesterday as the BoE minutes showed 2 MPC members voted for an interest rate hike. However, grim UK growth prospects stopped the pound gaining much. At 08:30am this morning rates are as follows:
  • GBP/EUR 1.1642
  • GBP/USD 1.5912
  • GBP/AUD 1.6053
  • GBP/NZD 2.0669
  • GBP/CAD 1.5848
  • GBP/CHF 1.5037
  • GBP/ZAR 11.251
  • GBP/JPY 131.84
  • GBP/HUF 318.36
  • EUR/USD 1.3662

Sterling gains on Interest Rate expectations

The pound rose yesterday after minutes from the Bank of England's policy meeting this month showed two policymakers voted for an interest rate hike. Minutes of the Monetary Policy Committee's most recent meeting show members explicitly discussed the case for raising rates in January. The fact rates may go up means the pound gained against the Euro and other major currencies.

For most members the risks to inflation "in the medium term had probably shifted upwards," the minutes said. The fact that more members think higher rates are necessary strengthened Sterling and pushed exchange rates higher. Remember though, these minutes were released 2 weeks after the actual decision, and crucially this was before Tuesday's shock news that GDP growth has contracted and a warning that inflation could hit 5%.

Some MPC members were concerned a rate increase could be "misinterpreted as a signal that the committee would attempt the bring inflation back to the target excessively rapidly". A "relatively sharp tightening" could hurt activity and confidence, the minutes say.

Analysts said that there was evidently now much more concern about inflation on the MPC. "I don't think the BoE minutes will change the outlook," said Paul Robson, currency strategist at RBS Global Banking.

"The market may be pricing in chances of a rate hike but the UK faces the possibility of no growth and high inflation. There are concerns about stagflation and sterling will find it difficult to rise much." So, while the pound has gained slightly, the concerns over growth stopped Sterling gaining much against the Euro.

The poor GDP data will raise concerns about whether the UK economy is robust enough to withstand the government's harsh austerity measures aimed at tackling the fiscal deficit. Sticky inflation meanwhile will heighten the BoE's dilemma on whether to raise interest rates or not. While this uncertainty remains, Sterling exchange rates will remain volatile.

Today's Data

Today we see a raft of data from the EU so expect some movement in GBP/EUR rates. Consumer confidence, Economic Confidence and Industrial confidence are all released at 10am. From the USA we have various measures of unemployment. Jobless figures are very hard to predict and so expect some movement in GBP/USD rates today

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