The Pound reversed much of its earlier losses against the Dollar yesterday and bounced back above 1.3400 versus the Euro as a government report showed that UK factories raised prices at the fastest annual pace since 1991.
Producer prices for goods ranging from textiles to chemicals rose an alarming 5.7% from this stage in 2007 as gains in raw materials jumped to a record level, giving the Bank of England less scope to reduce interest rates.
The cost of raw materials increased 19.1% year-on-year in January, which is the most since records began in 1986 while the report will only serve to feed concerns over the growing threat of inflation.
The Pound rose 0.5% against the Dollar in the aftermath of the report as policy makers attempt to balance the risks to economic growth against rising inflationary fears as factories charge higher prices in order to offset record high food and energy costs.
The report yesterday coincides with news that UK manufacturing output prices rose 1% from December, the most in three years, while consumer prices may have also risen over the same period.
The report from the Office of National Statistics represents the broadest measure of inflation with prices forecast to climb to an annual rate of 2.3%, up from 2.1% in December.
The European Central Bank Chairman, Jean-Claude Trichet, finally acknowledged that economic growth is susceptible to a U.S led global recession and will continue to slow over the coming months, leading to an inevitable cut in interest rates.
The tone of his statement indicates that the resilience of the European economy is showing signs of cracking with business and consumer sentiment plummeting on an almost monthly basis.
The Euro has fallen 2% against the Dollar over the past week and consolidated above 1.3400 versus the Pound last night while the single currency may struggle to recover this morning as German investor confidence probably fell to the lowest level in 15-years.
The ZEW index of investor and analyst expectations is forecast to drop to a reading of minus 45 in February as the recent slump in stock markets increased pessimism about the economic outlook.
The surprising resilience of the Dollar continues to be the dominate theme in the market as the U.S currency consolidated on the recent gains made against both the Euro and the Pound despite a barrage of weakening economic data.
The Federal Reserve have lowered U.S interest rates by 125 basis points since the beginning of the year and Fed fund futures have already priced another three-quarter percentage point reduction over the coming months.
The market has anticipated and priced in every one of these moves and for that reason, a host of exceptionally poor economic reports have failed to drive the Dollar lower. In addition, the renewed appetite for risk aversion also served to renew sentiment in the U.S currency but a number of cautious comments from G7 finance ministers at the weekend seemed to focus on the persistent downside risks to global growth.
Nevertheless, FOMC member and Federal Reserve Bank of St Louis President William Poole echoed a recent hawkish statement from Janet Yallen in saying that the U.S will probably avoid a recession as the Fed’s current monetary policy is appropriate for the slowing economy.
Data Released 12th February
UK 00:01 BRC Retail Sales (January)
UK 09:30 Consumer Price Index (January)
– Retail Price Index
GER 10:00 ZEW Index (February)
written by Adam Solomon
Related posts:
- The Pound receives a boost as UK house price inflation accelerates to the fastest pace in three years
- The Pound makes gains against the majors following a rise in producer price inflation
- The Pound remains largely unchanged as UK producer price inflation accelerates in April
- The Pound may make further gains against the majors following the report on Producer Price Inflation
- The Pound continues to make gains as growth in the UK economy accelerates to the fastest pace in two years
