Bank of England To Defend Why Inflation Keeps Rising

Mervyn King, Bank of England Governor, will have to write an official letter to the Chancellor of the Exchequer explaining why inflation has stayed above its upper limit for most of the year following new data today. The consumer price index has risen by 3.1 percent from last year; far exceeding the 2 percent target. In King’s third letter so far of 2010 he will strive to maintain the credibility of the Bank of England and explain why inflation is so high. The Pound was trading at 1.5674 against the US Dollar and 1.2162 against the Euro at 10.40 am this morning.

Pound Sterling – UK Markets

This morning has seen the Pound experience volatility on the back on inflation data although it has so far maintained yesterday’s gains on the US Dollar. Although month on month inflation has shown a slight reduction, the focus is on year on year inflation which has come in at 3.1 percent. This means that by law, The Bank of England Governor will have to write to the Chancellor of the Exchequer, explaining why inflation is over one percentage point above its target 2 percent. Governor Mervyn King, had already suggested last week that inflation has increased faster than forecast due to the aftermath of the recession. However, this new statistic and the tone of King’s letter is likely to be watched by markets as some suggest that the Bank of England’s credibility is called into question. Debate is widening between policy members about the problem of increasing inflation, planned budget cuts and when to withdraw stimulus. An increase in inflation and the VAT increase next year means that the cost of living for the man on the street is going up.

US Dollar – US Markets

The latest set of uninspiring data highlighting a weak global outlook has continued to affect the Dollar which fell against the Pound yesterday. The New York Empire state manufacturing index grew less than expected and the National Association of Home Builders said its housing market index fell to its worst levels since March 2009. US industrial production data for July is due today and is expected to show a 0.5 percent increase from June. This is accompanied by other assorted data such as housing starts and building permit figures. There will also be a speech by Timothy Geithner, Secretary of the US Treasury in which he will summarise his outlook on the economy and initial feeling is that the US is far from out of the woods just yet.

Euro – European Markets

The Euro has made strong gains against the Dollar since yesterday. However there are negative data releases due today which are predicted to show slowing economic growth including German investor confidence for August. This also follows the news that inflation in the Euro zone hit a twenty month high last month with annual inflation rising to 1.7 percent in July. It is worth noting that the average GBP/ Euro exchange rate throughout 2010 has been circa 1.16 and although we are unlikely to return to this figure in the short term, anything above 1.20 for Euro buyers is certainly worth considering.

Other Currencies – Highlights

The safe haven currencies of the Japanese Yen and Swiss Franc have continued to stay strong, particularly against the Euro as speculation rises that the Euro is set to become much more fragile. The continuing strength of the Yen however is becoming an increasing concern for investors as the strengthening currency continues to negatively impact Japanese exports undermining economic growth. Minutes for August from the Reserve Bank of Australia have revealed a fairly optimistic outlook on the Australian economy with growth forecasts unchanged at between 3.75 and 4 percent. For a live quote or to tell us about your foreign exchange requirements, please call us on +44 (0)20 7740 0000.