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    1. #1

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      cerberus1 is on a distinguished road

      GBP update 22/02. The great debate continues

      THE GREAT RATE DEBATE CONTINUES
      Everyone has a view about where UK interest rates should go and when..


      Sterling was not entirely driven by interest rate hopes and fears but it was that outlook that accounted for most of the action. Virtually every day brought some new revelation or rebuttal. Investors dutifully reacted to each one in turn, paying most attention to whatever happened or was said most recently. Britain's business secretary set the ball rolling when he sided with the doves. Vince Cable told news agency Bloomberg that domestically-fuelled inflation is not an issue; "It's virtually deflation." As for a decision by the Bank of England to raise interest rates, he said it was "potentially very difficult". It looked a lot less difficult the following day when consumer price index (CPI) inflation came in at 4.0% and retail price index (RPI) inflation - the one that really eats into people's buying power and savings - hit 5.1%.

      In his quarterly letter to the chancellor explaining what's gone wrong and what he intends to do about it the governor appeared to hint that the Bank Rate would be up to 1.25% or even higher by the end of the year. Sterling went up. It went down the next day when the governor explained that the Bank's projections of inflation have to be based on some interest rate or another. It might as well be the market's expectations as anyone else's. That did not mean rates were going up this year. They might; they might not. Sterling went down. The following day monetary policy committee (MPC) member Andrew Sentance, the committee's arch-hawk, gave a speech explaining why higher rates are needed now. Gilding the lily, he also threw in a comment that a modest appreciation of sterling "...would mitigate the impact of global inflationary pressures in the short term and help to steer inflation back to the target over the medium term." Yes, somebody at the Bank of England (admittedly a part-timer but an important one) was talking sterling higher. Friday's contribution came from shadow chancellor Ed Balls, who told the Financial times that a 0.5% Bank Rate is appropriate. As Mr Balls will be in no position to do anything about it for a while his remark left sterling unmoved.

      Beyond the rate debate, the only UK data of any consequence were those for January's retail sales. Increases of a monthly 1.9% and an annual 5.3% were appreciably stronger than investors had anticipated and they responded by buying sterling. Estate agents' website Rightmove announced early this morning that its house price index had gone up by 3.1% in the year to February. Investors giggled. Even Rightmove admitted it had received 1.3 million new listings last year while lenders made little more than half a million mortgage loans. Rightmove expects that imbalance to continue this year.


      GBP v USD
      False starts on Monday and Tuesday came to nothing. Each one saw sterling fall back to its starting point. It eventually got going on Wednesday, adding two and a half cents by the end of the week. It was off its highs when London opened this morning.

      The dollar drifted through the week uninspired and unnoticed by the goings on around it. It was one of last week's two most notable underachievers despite the potentially lucrative revolutions going on in North Africa and the Middle East. At the beginning of this week it looks as though investors have started to recognise the potential nastiness that could result from Egypt closing the Suez Canal or Libya closing its oilfields but most do not seen unduly worried at the prospect. Those who do seem to favour the safe-haven Swiss franc, the week's second best performer, over the dollar and the yen, the week's laggards.

      Economic statistics had little impact on the dollar's fortunes but even on a good day they would not have been particularly helpful. US retail sales went up by 0.3% in January instead of the expected 0.5%. The NAHB housing market index, a barometer of house builders' misery, continued to bump along the bottom of a 0-100 scale at 16. Housing starts went up, building permits went down. Industrial production fell by -0.1% in January. CPI inflation was on target at 1.6%. It was all fairly tedious stuff and it failed to excite potential buyers of the dollar.

      The US begins this week with a day off for Presidents' Day (nee Washington's Birthday) and rounds it off with the first revision to first quarter gross domestic product (GDP). In between comes the Conference Board's estimation of consumer confidence and the useless but sometimes entertaining durable goods orders figure (it is impossible to forecast accurately). Sterling's two challenges are the MPC minutes on Wednesday (how many members voted for a rate increase; was it more than two?) and Friday's first revision to fourth quarter GDP (was it really that bad - or worse?).


      GBP v AUD
      If the Aussie owes last week's modest losses to anything it is to the growing nervousness about how the spate of revolutions in North Africa and the Middle East might push up the already lofty prices of food and energy, global inflation and, in turn global interest rates. China is feeling the pinch, raising interest rates and increasing the reserves that banks must set aside for the loans they make. Whilst higher commodity prices are in one way good for Australia's exports, they also have a negative impact on demand and act as a brake on the global growth that drives that demand.

      There was minimal input from the Australian economic data. Westpac's leading index improved from flat to a positive 0.8% in December. Motor vehicle sales were down by -1.9% in January and by -2.8% compared to a year earlier.

      There is little more to come this week apart from construction work done, the Conference Board's leading index and private capital spending in the fourth quarter. Sterling's two challenges are the MPC minutes on Wednesday (how many members voted for a rate increase; was it more than two?) and Friday's first revision to fourth quarter GDP (was it really that bad - or worse?).


      GBP v CAD
      The pound added a cent and three quarters over the seven days in a reversal of the previous week's losses. The two and a half cent range shared almost the same highs and lows.

      If the Loonie owes last week's modest losses to anything it is to its close association with the US dollar and to a growing nervousness about how the spate of revolutions in North Africa and the Middle East might push up the already lofty prices of food and energy, global inflation and, in turn global interest rates. China is feeling the pinch, raising interest rates and increasing the reserves that banks must set aside for the loans they make. Whilst higher commodity and oil prices are in one way good for New Zealand's exports, they also have a negative impact on demand and act as a brake on the global growth that drives that demand.

      A handful of low-importance Canadian data included a -4.8% monthly fall in motor vehicle sales, a net outflow of securities investments and slippage in the leading indicators from 0.4% to 0.3%. Investors were unfazed by a disappointing 0.4% increase in December's manufacturing shipments (they had been expecting a 2.5% increase) or by a slowdown in the headline rate of inflation from 2.4% to 2.3%.

      The most important Canadian statistic this week will be Tuesday's retail sales figures for December, expected to show a small decline. Sterling's two challenges are the MPC minutes on Wednesday (how many members voted for a rate increase; was it more than two?) and Friday's first revision to fourth quarter GDP (was it really that bad - or worse?).


      GBP v EUR
      The pound failed to break out of a cent and a half range, testing both edges of it without success (or failure). It opened in London this morning practically unchanged from a week ago.

      There was slight disappointment for the euro on Tuesday when the euro zone announced that its gross domestic product had expanded by 0.3% in the fourth quarter of last year. The forecast had been for growth of 0.4% and, whilst investors had been primed for a softer outcome by an earlier report that Germany's economy had grown by 0.4% instead of the predicted 0.5%, the market could find no reason to be jubilant. The rest of the week's Euroland data were low-key. ZEW's monthly survey revealed improvements in economic sentiment for Germany and the euro zone. Construction output fell by -1.8% in December. And that was pretty well all there was to it.

      Meanwhile the European Central Bank was busy providing emergency overnight liquidity to Euroland's commercial banks (16 billion on Friday, for example) any buying Portuguese government bonds to hold down the five-year yield to an almost-affordable 7% (Germany pays just 2.4%; so much for the single currency and the ECB's single 1.0% refinancing rate).

      But panic not: Lorenzo Bini Smaghi, a member of the European Central Bank's executive committee, rode to the rescue on Friday. Bloomberg quoted him as saying the ECB might need to raise interest rates if global inflationary pressures increase. "It is a key challenge for monetary policy to avoid spillovers and maintain inflation expectations in check," he said, "this requires the ability to take pre-emptive actions if needed." Although Mr Smaghi's is just one vote among 23 in the ECB governing council his position on the six-person executive board evidently lent his comment godlike status. Never mind that his comment was so mundane as to qualify for the blindingly-obvious category. It was sufficiently adrift from the ECB's previously relaxed statements that it energised investors to modify their opinion of the ECB's intentions.

      Euroland has almost less to offer this week on the ecostat front; industrial new orders, purchasing managers' indices, economic and consumer confidence, money supply and an update to German Q4 GDP. Sterling's two challenges are the MPC minutes on Wednesday (how many members voted for a rate increase; was it more than two?) and Friday's first revision to fourth quarter GDP (was it really that bad - or worse?).

    2. Moneycorp - Commercial foreign exchange since 1979
    3. #2

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      cerberus1 is on a distinguished road
      With UK inflation rising, further divisions are forming among the members of the MPC. Yesterday’s minutes of the last meeting revealed that the number of members voting for a rate rise increased from two to three.
      The pound has jumped against the dollar as a result – reaching an annual high. Great news for anyone travelling to the States or for British expats living in the US and making regular payments.
      David Kerns, Dealing Manager at Moneycorp:
      “Sterling rose this week on the news that Bank of England chief economist Spencer Dale had joined Andrew Sentence and Dr Martin Weale in calls for an immediate interest rate hike. The pound is now trading close to 1.6270 against the US dollar – the highest it has been so far this year.

    4. #3

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      Aldo is a Dil
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      thearmchairdetective is on a distinguished road
      I do miss the weekly financial uodates John used to do pon this site.
      Be nice if he came back sometime.

    5. #4

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      cerberus1 is on a distinguished road
      Similar to pomsinoz, we'll be linking up with Moneycorp on here in the not too distant future, so (Moneycorp) John will post weekly updates and should be available to answer any forex queries.