Bank of England Fail To Prevent Inflation Rising Again

Over the past twenty four hours the Pound reached its highest levels against the Dollar in a week - but suffered opposite downwards movement against the Euro to the lowest levels in the last seven days. This reflects a weakening Dollar as markets await the Federal meeting today, in contrast to the single currency where decisions already taken regarding bond purchases have shored up confidence. Higher UK inflation at 3.3 percent this morning however may help put some wind in Sterling’s sails although any movement so far has been temporary and minor.

Pound Sterling – UK Markets

Yesterday’s beak housing report dampened the Pound against the strengthening Euro, although this morning’s inflation figures should help with positive sentiment towards Sterling. Inflation is once again above target, registering a yearly increase of 3.3 percent, up from 3.2 percent last month. This equates to a monthly increase of 0.4 percent. The rise in inflation is thought to be due to surging food and clothing costs with a 1.6 percent rise in food prices and a 2 percent rise in clothing costs. This is the highest increase in both sectors since records began. Although this highlights the Bank of England’s failure to keep inflation within the 2 percent target, markets are likely to react positively in terms of investing in Sterling as the figures make an interest rate rise more likely. The inflation figures come on the same day as a report by KPMG that claims many retailers are going to use next month’s VAT rise to ‘mask’ more extensive price rises.

US Dollar – US Markets

A combination of factors fuelled the US Dollar’s decline yesterday. Credit ratings agency Moody’s announced increased the likelihood of a negative outlook on the US’s AAA rating in response to the latest US tax decisions. Today’s FOMC meeting about monetary policy is also breeding uncertainty. The Dollar is also thought to have been affected by China’s decision not to raise interest rates as expected over the weekend which in turn has dampened the demand for the safe currency and instead built up risk appetite. Today’s FOMC meeting is expected to result in the same course of monetary policy being followed despite there being some rumours of the debt purchases increasing. Movement however could come from this afternoon’s inflation data released alongside retail figures.

Euro – European Markets

The Euro has been doing surprisingly well largely in response to the dropping US Dollar and the fact that European leaders are working towards stepping up action to support the currency. Last week’s bond purchases seem to have shored up confidence and markets seem to have been appeased that differences between EU leaders in how to deal with ongoing rescue funds have been overcome. This Thursday’s EU meeting may still bring some uncertainty but whether this will affect the currency and pull it back down will be also co-dependent on what happens with the US Dollar and whether the Dollar picks itself back up or takes another hitting from data releases this week.

Other Currencies – Highlights

The New Zealand Dollar has reached a ten year low against the Australian Dollar as retail sales figures fell by the most since 1997. Retail sales dropped by 2.5 percent in October. The currency touched its weakest level since November 2000 against the Australian Dollar. For a live quote or to tell us about your foreign exchange requirements, please call us on +44 (0)20 7740 0000.