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Sitting on the fence until the Bank of England minutes

Sitting on the fence until the Bank of England minutes

The Euro gained against the USD, bolstered by strong demand for an Irish bond auction and sale of Spanish treasury bills. However, the German ZEW investor confidence index dropped well below expectations, adding a question mark over the sustainability of the Eurozone economic recovery in the aftermath of the superb German GDP figures from last week.
 
For Sterling, the major event was inflation figures release. Yesterday’s data showed the UK CPI rate edging lower to 3.1% in July from 3.2% in June. While the July headline rate was in line with expectations, and its lowest since February, it remains more than 1% above the BoE’s target level and as such triggered a letter from the BoE Governor to the Chancellor for the third time this year.
Governor, Mervyn King, conceded in this letter that the MPC had been surprised by the strength of inflation and warned that he might have to write further letters in the coming months. However, King also reiterated that he still expected inflation to fall below target on a two year horizon, blaming the persistent high inflation rate on one-off factors – the increase in VAT, past increases in oil prices and the depreciation of sterling. These factors, the MPC believe are masking the fact that underlying inflation pressures are easing and will continue to do so given the large amounts of spare capacity. Just in case you are wondering – what does this mean for me? Higher inflation is traditionally combatted by higher interest rates – bad news for mortgages but good news for GBP as the higher interest rates effectively make GBP more attractive on a global scale.
 
Naturally this release did nothing to change the view that UK rates remain on hold for some time yet, with Sterling slipping on the back of this accordingly. Sterling has also been sold ahead of the publication of MPC Minutes this morning. While the central expectation is that the MPC voted 8-1 to keep rates on hold and maintain asset purchases of £200 billion, the fact that the August meeting took place during an Inflation Report round means that there is more likelihood of any other splits within the Committee emerging. Though the debate over further quantitative easing in the UK could be described as speculative, the clamour has been building in the US for some time.  Many economists, as with the original round of QE, remain sceptical over whether additional easing is more of a gesture towards restive financial markets than a genuinely useful policy stimulus. When the Bank of Japan pioneered QE in the early noughties, they purchased 8.7% of GDP without managing to lift the country from its economic mire, with various anecdotal reasons why. The Fed has already bought up $1.5 trillion of assets, a spectacular 11.2% of GDP, and so may pause before yielding to the cries from Wall Street.

If you would like Currency UK to explain what all of this means for your currency requirements then please do not hesittate to contact us on +44 (0)20 7738 0777

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