Doom and gloom as GBP/EUR struggles
Good news! The Consumer Price Index (CPI) fell back from 4.4% in February to 4% in March as supermarkets and High Street chains cut prices. This is great news from a personal point of view as nothing attracts my eyes in a supermarket quite like a red and white sale sign. However, the drop in inflation is surprising, especially as global food prices have been soaring since mid-way through 2010, which suggests that supermarket margins are now being squeezed to attract weary consumers.
It is likely that this fall in inflation will put the final nail in the coffin for a May rate hike as inflation excluding Government tax increases now stands at 2.4%, just marginally above the 2% target rate. Currency markets unwound the priced in May rate hike quickly yesterday with Sterling reaching its lowest level against the Euro since October 2010 immediately after the CPI announcement. There now seems to be a general feeling that a rate hike may be pushed back to August or September, with Andrew Sentence (the No. 1 hawk) approaching his final month on the MPC.
Today sees the release of unemployment figures which are expected to show youth unemployment reaching a record high of 1m, meaning that one in five 16 to 24 year olds are unemployed. The market consensus is for overall unemployment to remain steady at 8%, so expect any improvement on this to lead to Sterling strength as it might suggest a hope remains of a May rate hike. Also released today is the average weekly earnings which is expected to rise to 2.6% on a 3 month basis. This would suggest wages are slightly above inflation on a constant taxation basis.
Across the English Channel the European powerhouse of Germany continues to lead the economic recovery with the well respected ZEW survey of the current market situation showing a rise to 87.1, which is exceeded market expectations. There are however some signs that growth may slow slightly, with future expectations dropping back due to the rise in interest rate, and the situation in Japan and Libya.
In overnight trading Sterling remains subdued against the Euro with GBP/EUR trading at 1.1232. Sterling is trading higher against the dollar today at 1.6289. This could be down to the IMF warning that the US should make a ‘down payment’ on its budget deficit this year.