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UK inflation data buoys Pound
Traders bullish on the British Pound have been waiting anxiously for economic data to be released that would provide an impetus for the Central Bank of Britain to raise interest rates. On Tuesday, they got their wish, as a flurry of data revealed British price levels are slowly creeping up. Despite sagging energy prices, core inflation is running at an annualized rate of 2.4%, and retail sales are up nearly 4% in 2006. The new consensus is for the UK Bank to raise interest rates by 25 basis points at its next meeting, which is scheduled for November. The Financial Times reports:
By mid-afternoon in New York, the pound was 0.5 per cent higher at a one-week high of $1.8700 against the dollar and up 0.4 per cent to £0.6707 against the euro.
Read More: Inflation Figures Boost Sterling
nflation figures boost sterling
By Peter Garnham
Published: October 17 2006 11:18 | Last updated: October 17 2006 17:36
sterling
The pound advanced on Tuesday after UK inflation data supported the widely-held conviction that the Bank of England would raise interest rates in November.
Official data showed that consumer prices rose 2.4 per cent in the year to September, down from 2.5 per cent in August.
However, analysts said that this was almost entirely due to the effects of falling oil prices and that the headline figures masked inflationary pressures elsewhere in the UK economy. A jump in retail prices was also likely to raise concerns at the Bank of England.
The retail price index rose to an annual 3.6 per cent in September, an eight-year high. “There is a very real danger that 2007 wage settlements will be markedly higher, as many pay deals are still based on the retail price index,” said Howard Archer, economist at Global Insight. “Consequently, I expect the Bank of England to make a further precautionary 25 basis point interest rate hike in November.”
By mid-afternoon in New York, the pound was 0.5 per cent higher at a one-week high of $1.8700 against the dollar and up 0.4 per cent to £0.6707 against the euro.
The dollar was little changed against the euro on Tuesday, easing 0.1 per cent to $1.2540, despite a heavy US economic calendar, which included TICs data showing a forecast-beating surge of capital inflows into the US and figures which revealed a shock drop in US industrial production in September.
However, Marc Chandler, currency strategist at Brown Brothers & Harriman in New York, said the figures were largely inconsequential.
Mr Chandler argued that short-term traders were ignoring the data since the market had just moved from pricing in a cut in US interest rates to a pause and were not prepared to contemplate a rise.
“The market has found an equilibrium on interest rate action from the Federal Reserve,” he said. “The bottom line is that the pressure on the dollar over the last few days represents profit taking from traders disappointed that it could not breach Y120 in dollar/yen or $1.2480 in euro/dollar.”
Earlier in the session, the euro had been left similarly unmoved by weaker-than-expected eurozone inflation figures and a drop in the ZEW index of German business confidence.
Mitul Kotecha, global head of FX strategy at Calyon, said while the fall in the ZEW index was unlikely to help the euro, it would have little impact on European Central Bank policy, with the next rate rise still likely in December.
Elsewhere, the yen continued to derive support from Russia’s announcement on Monday that it was adding the Japanese currency to its foreign exchange reserves, rising 0.3 per cent against the dollar to Y118.65 and 0.2 per cent against the euro to Y148.90.
The news has aroused interest not only because, at $270bn, Russia’s foreign exchange reserves are the third largest in the world, but also because global central banks are underweight in the yen, and the Russian move could herald similar purchases from other countries.
Gavin Friend, strategist at Commerzbank, said the reasons behind the Russian action was unclear, but the attraction was obviously not yield, given the low level of Japanese interest rates. Instead, he said, the Russians might have been driven by anticipated capital gains since the market consensus forecasts for dollar/yen in the first quarter of next year and the last quarter of 2007 were Y110 and Y105, respectively.
According to Mr Friend, it was possible that other central banks could follow Russia’s lead. “With central banks and monetary authorities in Asia and those linked to petrodollars all awash with cash, potential capital gains from the yen might prove attractive,” he said.
The Canadian dollar fell 0.3 per cent to C$1.1400 after the Bank of Canada revised down its forecasts for economic growth in a statement that accompanied its decision to leave interest rates unchanged.
Tania Kotsos at RBC Capital Markets said she expected the Canadian dollar to weaken further and drop to C$1.17 by the year-end on the back of Canada’s deteriorating trade position and a slowdown in the merger and acquisition inflows that have been supporting the currency
Copyright The Financial Times Limited 2006
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