Pound drops as inflation concerns dominate
Sterling opened with pep in its step with a move to above 1.2300 against the dollar with further short covering. The Bank of England’s Chief Economist Huw Pill stated yesterday that the bank will continue to act if price pressures persist, but is aware of the risk of recession. Pill added that he was worried that using interest rates to stabilise the Sterling exchange rate in the short term would be a distraction, but the market still expects rate hikes at a faster pace to help curb imported inflation and curb wage settlements.
The CBI industrial orders index shrank; solid growth in output although showing signs of a net slowdown. Significantly expectations surrounding price growth printed the lowest reading since September 2021.
Sterling failed to keep the gains as underlying sentiment towards the economic outlook remained weak but held around 1.2270.
ECB council member Olli Rehn stated that it was very likely that the bank will raise rates by more than 0.25% in September; the markets assume it will be 0.5%.
The German gas regulator called for the country to save as much gas as possible. The BDI added that there was a recession risk in Germany as the Russian gas crisis intensified. The Euro advanced to highs just above 1.0580 against the dollar before fading.
Richmond Fed President Barkin there was not much reason to stop raising interest rates if inflation keeps escalating. He added that the Fed will do what it takes to reduce inflation and it should come down, but it will take some time.
This morning UK CPI inflation rate increased modestly to 9.1% as expected but the underlying rate declined slightly more than expected to 5.9% (from 6.2%).
The Pound opens near 1.2230 against the dollar with the Euro little changed around 1.1650. The Euro is just below 1.0500 against the Dollar despite a sharp decline in oil prices. Comments from Fed Chair Powell will be watched closely later in the day.