High inflation boosts the Pound vs Euro

19th January 2011
Good morning. As we predicted in yesterdays post, inflation figures for the UK were higher than expected yesterday, and as a result Sterling rose against most other currencies. Rates at 08:30am this morning are as follows:

  • GBP/EUR 1.1900
  • GBP/USD 1.6014
  • GBP/AUD 1.5920
  • GBP/NZD 2.0634
  • GBP/CAD 1.5836
  • GBP/CHF 1.5340
  • GBP/ZAR 11.002
  • GBP/JPY 131.47
  • GBP/NOK 9.3393
  • GBP/HUF 323.72
  • EUR/USD 1.3454

UK Inflation higher than expected

UK inflation jumped in December with the Consumer Prices Index (CPI) rising to 3.7%, up from 3.3% in November. The rise will put further pressure on the Bank of England to lift interest rates to curb rising inflation.

Sterling was 0.77% higher against the dollar, pushing above $1.60 for the first time in months. Against the Euro Sterling rose around half a cent as traders factored in the chances of an earlier-than-expected rise in interest rates.

However here are few indications that a majority of the Monetary Policy Committee are ready to respond with an early rise in the base rate. Most analysts expect a rise around August time, however it could be as soon as May. See yesterdays report for an in depth look at the effect of interest rates on Sterling exchange rates.

As discussed yesterday, there is conflicting opinions on when rates will rise. Howard Archer, economist at Global Insight, said an increase could be on the cards.

“Despite the undeniably significant risk to growth coming from the fiscal tightening that is now increasingly kicking in, there is mounting pressure on the Bank of England to enact at least a token near-term interest rate hike to send out the message that it has not taken its eye off the inflation ball,” he said.

But the British Chambers of Commerce (BCC), echoing calls made at the weekend by the Ernst & Young Item club, said the Bank must “hold its nerve” in the face of calls for an early increase in interest rates.

“Raising rates at a time when fiscal policy is being tightened, while businesses and individuals are facing greater pressures, would be a mistake and should be avoided,” said David Kern, chief economist at the BCC.

So, lack of consensus means lack of direction for Sterling, and already this morning we’ve fallen around half a point vs the Euro.

Today’s Data

UK Unemployment measures are released today, and we expect a total of 7.9%. More than this and Sterling may fall.

From the EU there are measures of construction output, showing how this sector is performing.

From the USA we see various measures of housing including Building Permits, Mortgage Applications and Housing Starts. There are some inflationary measures today from New Zealand & Australia also.

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