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King opens his mouth and GBP falls

King opens his mouth and GBP falls

Having subtly hinted in his letter to the chancellor on Tuesday that rate increases this year are very much on the horizon as the market expects, Mervin King spent yesterday’s Quarterly Inflation Report news conference largely unwinding this expectation, again reverting to the more dovish line he has toed consistently for the last two years. King noted that the Bank of England sees an equal chance of CPI being above or below the 2% level in 2 years time if current price trends remain in place. The view was more neutral than the market had expected given the high level of current inflation, and tempered the certainty with which the market had priced in these rate increases throughout 2011. The market is anticipating rate rises on the back of recent inflation data and while the report opened the door to tightening, King looked to pull the market back. He said that there are big divisions on the nine-member policy committee and that the outlook for the economy and inflation was highly uncertain and insisted no decisions had been made. “Some people are running ahead of themselves and saying that we are pre-announcing or laying the ground for a rate rise,” King said. “That decision has not been taken and won’t be taken until we get to the next meeting or the following meeting, or it may be many quarters.”

Having shot up a cent and a half after the release of governor King’s letter, this was entirely reversed post-conference yesterday. The fact that the market was looking for King to kick off the conference it the same vein as his letter left them even more wrong footed, exacerbating the drop in Sterling, though given the steady rise in Sterling interest rate expectations since October, a correction was perhaps inevitable at some point. This morning, Andrew Sentance, perennial hawk, has reiterated his inflation concerns, giving Sterling a minor shot in the arm.

Elsewhere, yesterday proved to be another choppy day for the euro versus the USD, with the single currency succumbing to some selling overnight, though trade remains well within familiar ranges. The dollar was supported by some better than expected US housing data, with an upgrade to the Fed’s outlook for the economy also helping.

There are a host of US data releases worth watching this afternoon, starting with the CPI report for January. The data should reinforce expectations that inflation pressures remain sufficiently subdued as not to warrant action from the Fed. Also due in the afternoon are weekly jobless claims and the latest Philly Fed index. Meanwhile, in Europe the only data of note is the flash consumer confidence reading for this month.

What does this all mean for me? Well buying your EUR, USD, AUD or any other currency at the wrong time could cost you a fortune. There is no crystal ball but Currency UK can give you the information you need to make an informed decision.


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