Pound vs US Dolllar

Good Morning. The pound rose yesterday after figures showed inflation in the UK rose. Rates @ 08:30am stand as follows:

  • GBP/EUR 1.1274
  • GBP/USD 1.6801
  • GBP/AUD 1.8046
  • GBP/NZD 2.2534
  • GBP/CAD 1.7681
  • GBP/ZAR 12.510
  • GBP/JPY 149.78

UK Inflation
A key measure of UK inflation has risen for the first time since February, official figures have shown. The Consumer Prices Index (CPI) climbed to 1.5% in October, up from 1.1% in September. Meanwhile the Retail Prices Index (RPI) inflation measure, which includes mortgage interest payments and housing costs, rose to -0.8% from -1.4%.

Inflation accelerated mainly because fuel prices fell by a lot less than they did in the same period a year ago. Analysts had expected the rate of inflation to rise, so the figures came as no surprise to the City. “I don’t think this is anything that will worry the Monetary Policy Committee [of the Bank of England] too much,” said Amit Kara at UBS.

“The MPC has highlighted that inflation is going to be very volatile in the near term.” Given the serious risks facing the UK economy and the dangers of a double-dip recession in 2010, it is important for the MPC to persevere with an aggressive QE programme, and to consider special measures aimed at boosting bank lending to businesses,” said David Kern, chief economist at the British Chambers of Commerce.

So, with little chance of interest rate hikes, and more QE likely, we’ve seen yesterdays gains already pull back, as the pound is likely to remain weak well into 2010.

US Dollar
As global stockmarkets generally performed strongly, improving investor sentiment undermined some support for the US Dollar. However, the University of Michigan consumer confidence index, released on Friday, was weaker than expected and fell to the lowest level for three months, adding to US Dollar weakness late in the week.

This was balanced by earlier employment data showing that US jobless claims in the latest week fell to the lowest level since January, boosting some expectations that the US labour market could be stabilising.

Consumer price inflation data on Wednesday will be closely watched for signs that inflationary pressures are building (Inflationary pressure is when the price of goods and services in general increase at a higher rate than wages, thus causing a financial strain). A larger than expected rise could potentially offer support to the US Dollar on expectations that the Federal Reserve will eventually need to raise interest rates as the inflation risks intensify. However, global trends in investors’ risk appetite levels are likely to remain an important influence on the US Dollar’s overall performance.

The potential threat of Inflationary Pressure on both GBP and USD could force both the BoE and the Fed to take action sooner than expected. Taking advantage of the current gains made by GBP against USD should be considered as the potential to increase interest rates by the FED to counter inflationary effects would make USD a more attractive investment. On the flip side this would also affect those wishing to sell their Dollars as Dollar strength is undesirable.

Queens Speech Today
Written by the government and delivered by the reigning monarch, it sets out the legislative agenda for the year ahead and is the centrepiece of the state opening of Parliament. The government will promise a bill obliging it to halve its budget deficit within four years when it announces its planned new laws in the Queen’s Speech.

This will be interesting to see how they plan to do this, as the huge deficit the UK has is one of the reasons the pound is so weak. Analysts have no clue as to how the government plan to reduce this, so this may give clues as to the plan. Wooly comments will simply cause further Sterling weakness.

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