The Pound recorded widespread gains against the majors yesterday, rising to a seven week high versus the Euro and briefly revisiting the $2.00 level following the release of the minutes from the Bank of England’s last policy meeting.
The voting pattern of the nine strong committee showed that at least one member of the MPC is leaning towards an increase in UK borrowing costs as some members believe that inflation becomes the primary threat to the economy.
Consumer prices have risen to the highest level in 16-years as the escalating tensions in the Middle East pushed the price of crude oil to a record high of $147.29 on July 11th.
UK manufacturers have been forced to pay record high prices for raw materials and have little choice but to pass that cost on to the consumer, stoking the already persistent inflationary pressures.
Nevertheless, many areas of the economy are reporting slower growth as the impact from the U.S subrprime mortgage crisis spreads through services, manufacturing and housing.
Tighter lending conditions means that consumers are unable to spend and support growth while a declining labour market may see the economy slip into recession later this year.
The Pound also enjoyed a strong intraday rally against the Australian and New Zealand Dollar as MPC member, Timothy Besley, elected to raise interest rates in July and said that accelerating inflation is putting the Bank’s credibility at risk.
The Bank of England’s handling over the Northern Rock affair and the credit crisis in general has already reduced confidence in the Central Bank and with prices forecast to hit 4.5% later this year, policy makers may have little choice but to raise interest rates.
The surprisingly hawkish tone of the minutes saw the Pound rally against the majority of the 16 most actively traded currencies but the short-term momentum in Sterling is unlikely to last over the coming weeks.
The majority of the committee voted to keep rates at 5.0% this month aside from David Blanchflower, who again highlighted the necessity to reduce borrowing costs and the Pound may be tested this morning as a report from the Office of National Statistics probably showed that retail sales fell 2.5% in June.
The Euro traded close to the lowest level in two weeks versus the Dollar yesterday as the sustained decline in oil prices continued and the drop in Euro-zone industrial orders emphasised the deterioration in the outlook for the economy.
Orders plummeted three times initial estimates in the revised numbers for May as a stronger currency and a slump in domestic demand weighs heavily on business confidence.
Elsewhere, retail sales in France and Italy were also below expectations and therefore the tone of the German Ifo sentiment index is expected to point to further downside risks to growth.
Although the Dollar initially declined against the Pound following the release of the BoE minutes, the U.S currency consolidated back below $2.00 by the close of trading last night and also registered sharp gains versus the majority of the major currencies.
The revival in Dollar sentiment can be attributed to speculation that the U.S government rescue plan for Fannie Mae and Freddie moved a step closer to congressional passage while oil prices continued to tumble through $125 a barrel.
The renewed sense of stability surrounding the financial industry combined with speculation that oil prices have peaked sparked rumours that the Federal Reserve will raise interest rates by September.
Data Released 24TH July
U.K 09:30 Retail Sales (June)
EU 09:00 Flash PMI – Manufacturing (July)
- Services
GER 09:00 Ifo Index (July)
U.S 13:30 Initial Jobless Claims (w/e 19th July)
U.S 15:00 Existing Home Sales (June)
written by Adam Solomon
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