Inflation and the economy today

Overview of GBP yesterday:

Against USD: +0.39%

Against EUR: +0.50%
Against CHF: - 0.87%

Against NZD: +1.12%

Against AUD: +0.10%

Against ZAR: -0.39%

Against CAD: -0.01%

Against DKK: -0.50%

Focus on Inflation
This report primarily focuses on inflation, both in the Eurozone and the UK, and how this could affect your exchange rate in the coming months.

Sterling
Bank of England governor Mervyn King yesterday gave a speech to the Bank of Israel, and said the rate-setting Monetary Policy Committee (MPC) must not allow the UK economy to slow too much in case inflation falls below target. He also warned of the costs of allowing inflation expectations to persist.

In a fairly balanced speech at the Bank of Israel, King stressed the MPC inflation target of 2.0 pct is symmetric.

'So even though some slowdown in the growth rate of economic activity is likely to be necessary to ensure that inflation returns to the target, we cannot allow the economy to slow too sharply, lest a margin of spare capacity is produced that pulls inflation down below the target next year,' he said.

Balancing that concern, King warned about the costs of dislodging higher inflation if it is allowed to become entrenched.

'The best thing we can do to promote economic stability is to avoid inflation, and inflation expectations, from becoming dislodged from the target in the first place,' he added.

King said the Inflation Report in February sees inflation falling back towards the target next year as commodity prices stabilise but the MPC cannot ignore the pick-up in inflation that could soon see the CPI rate back up in letter-writing territory of over 3 pct.

'In judging how far inflation is likely to fall back next year, we have to gauge the extent to which high inflation in the short term will enter the expectations of those setting prices and pay,' King said. 'If it does so, then without some margin of spare capacity, inflation will have some tendency to persist above the target.'

Analysts are taking these comments as a clear indication that further Interest Rate cuts are imminent, despite the fact inflation may edge over 3%.

This could well result in Sterling weakening, and the rate of exchange continuing its downward trend.

Euro
The European Commission said the estimate for Euro zone inflation is higher than it had expected, but added that it will await further figures in April before deciding whether to revise its forecasts.

Asked about the provisional March inflation figure of 3.5 percent released by EU statistics arm Eurostat yesterday morning, commission spokeswoman Amelia Torres said that 'it is not a good figure, it's more than we expected'.

This marks another record for the period since the launch of the Euro, adding to the European Central Bank's worries about price pressures.

Torres said it was too early to say whether the commission would revise its inflation forecasts.
'We will await the more specific figures in April,' she said.

Economists polled by Thomson Financial News had forecast a more modest figure of 3.4 percent.
This data lends itself to the possibility that the European Central Bank could well move to raise Interest rates to stem rising inflation. Higher rates often results in a strengthening of a currency, so this could potentially lead to the exchange rate for Sterling to Euro to fall even further.

Summary
So, to summarise, both the UK and EU are heading for higher inflation, but the actions of the central banks could not be more different.

The EU may well raise interest rates to kerb inflation. In contrast the BoE seems happy to let inflation temporarily rise, in expectation that it will come down again next year. This gives the BoE free reign to cut interest rates further this year to give the burgeoning UK Economy a boost.
A likely outcome is a stronger Euro, and weaker pound, resulting in even lower exchange rates for Sterling to Euro.

Even though rates are currently at an all time low, postponing your purchase in the ‘hope’ things may improve may not be the right course of action, as things may well get a lot worse before they get better.

To discuss your currency needs in more detail, please contact me today.

Today’s Data:
UK09:00 UK Purchasing Managers Index (PMI)

EU07:55 German Unemployment08:00 EU & German PMI09:00 EU Unemployment

US14:00 Manufacturing and Construction Data

(PMI data captures business conditions in the manufacturing sector. As the manufacturing sector dominates a large part of the economy, it’s an important indicator of business conditions and the overall economic condition.)