GBP has uncertain gains
Well who would want to be an MPC member right now? This morning, Ed Balls is cited in the press criticising King’s effective endorsement of the coalition’s austerity measures, they have critics claiming inflation is out of control and even a member of the MPC committee, Andrew Sentence, effectively saying policy has been wrong and rates should have risen earlier. So is high inflation all Mervin King’s and the MPC’s fault? Well consider this, the 4% figure released on Tuesday was greatly affected by two major factors, tax rises and QE2, no not the famous ship – America’s second round of quantitative easing. Tax rises like VAT and fuel duty, according to the ONS, contributed 1.6% to the overall inflation figure while United States $600 billion quantitative easing programme is flooding cheap capital into the commodity markets, driving up prices.
Now the MPC haven’t helped themselves, with a series of mixed messages, evident this week with Mervin King’s rather hawkish letter to the Chancellor followed by a rather dovish press conference. This uncertainty caused Sterling volatility as the market attempted to gauge the MPC’s sentiment and is good an example of what Mervin King’s terms his Diego Maradona theory. When Maradona scored his famous goal against England in the 1986 World Cup, he actually ran in a straight line as England defenders reacted to what they expected him to do. Therefore, if there is the mere expectation of rate rises this prompts an increase in market rates – without the MPC actually doing anything. All sound a bit confusing? Well think about it like this, Sterling rose to 1.6220 against the dollar in early morning trading on renewed speculation that the BOE are likely to increase rates, with markets factoring in what the MPC might do, when King’s has clearly stated nothing is guaranteed and is reviewed on a month to month basis. What is clear is there will be a many changes in sentiment before rates actually do move.
In other news yesterday, the resurgence of British manufacturing continued to gather pace with the CBI industrial survey reporting strong exports and healthy domestic demand. Significantly, UK manufacturers did report that inflationary pressures were building, which further supported sentiment of rate tightening, with markets factoring in 25bp hike in May. In early morning trading, Sterling was trading at 1.1933 against the euro, buoyed by stronger than expected UK sales data released 9.30 GMT. Rumours of a 3rd member of the MPC favouring monetary tightening also helped GBP/JPY move through the 135.00 barrier.