Good Morning. The pound rose yet again yesterday after better than expected inflation data.
Yesterday economists said they were shocked by the massive rise in inflation, the biggest jump in a single month since the index began in 1997. It was pushed up by a dramatic increase in the cost of fuel, as well as a lack of big pre-Christmas discounts on the High Street.
The retail price index, another measure of inflation which includes housing and tax costs, rose from 0.3 per cent in November to 2.4 per cent last month. This was the biggest jump since 1979, the year inflation hit 15 per cent.
Why did this boost the pound?
Higher inflation increases the chances of interest rate hikes. Higher interest rates mean a better return for investors, and therefore they buy Sterling in anticipation. More demand = higher price and therefore the pound strengthens relative to other currencies.
Will it last?
Probably not. The governor of the Bank of England has renewed his warning to the government that it must cut the public deficit. Mervyn King said uncertainty about the government’s intentions had a direct bearing on monetary policy.
He said “a key element in raising the national saving rate is the elimination over time of the structural deficit in the public finances”.
The huge debt levels relative to other economic zones will likely hinder recovery. Many clients have taken Forward contracts in the last few days, keen to lock the current high rate in to protect against a loss. If you would like to do the same contact us today.
Bank of England minutes and unemployment data for the UK. If the minutes signal that more money will continue to be pumped into the economy, expect the pound to fall. Watch unemployment figures too. We expect the ILO unemployment rate to be 8%. Any higher, and the pound will likely fall.
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