Bank of England Minutes Give Sterling Another Push

The Bank of England minutes from November’s policy meeting have given Sterling another positive push as they re-confirmed expectations following last week’s inflation report and also coincide with better than expected UK employment figures. The minutes revealed a 7-1-1 split in the voting and highlighted that inflation is forecast to continue to be above target throughout 2011. Yesterday’s inflation figures only gave Sterling a temporary boost so it is unclear whether this morning’s releases will similarly provoke a short term rally or last further into the week.

Pound Sterling – UK Markets

This morning’s Bank of England minutes and employment figures have helped Sterling begin to push up against the Euro and US Dollar today although if this follows yesterday’s precedent it may be temporary. The minutes confirmed the 7-1-1 split in voting with Andrew Sentence voting to increase interest rates and maintain the level of asset-purchasing, whilst Adam Posen voted to maintain interest rates but increase quantitative easing by £50 billion. Generally speaking, it was explained that ‘the range of views from the committee’ on growth and inflation was ‘wider than usual’ which highlights how uncertain the markets are. Significantly, the minutes confirmed that inflation will remain ‘elevated’ in the ‘near term’ on account of utility prices rising coupled with the VAT increase to 20% in January. In terms of currency, this indicates that pressure will mount for a UK interest rate rise which would be likely to strengthen Sterling however this is unlikely until the end of 2011 as the impact of a rate rise on the man on the street could be devastating for economic recovery. Although uncertainty was emphasised in the minutes, the overall outlook was fairly positive with the conclusion that ‘the considerable stimulus from monetary policy, together with a further expansion in world demand and the past depreciation of Sterling, should support recovery’. The better than expected jobs data this morning showed a surprise fall in unemployment. This however, is thought to be concentrated on part-time jobs and self employment.

US Dollar – US Markets

The Dollar index is at its highest levels since September and has particularly strengthened against the Euro as worries about Irish debt persist, stifling risk appetite. It closed at $1.3612 against the Euro yesterday, gaining 0.1% over the course of the day. In data yesterday, industrial production in the US was unchanged for October where a rise had been expected and the producer price index was also a little short of forecasts but TIC flows of financial capital to the US had expanded. The Dollar also benefited however from comments made by the Fed’s James Bullard that the Federal Reserve will not necessarily end up using the full 600 billion dollars as planned if the economy continues to improve. Data is due out today on the US consumer price index and the number of new house constructions. It is anticipated that the consumer price index will indicate that inflationary pressure is under control in the US whilst housing starts are likely to show a further fall.

Euro – European Markets

Eurozone financial ministers met in Brussels last night with the Irish sovereign debt question at the top of the agenda as the Euro trades near a seven week low. The Irish insist that they can meet their obligations without outside assistance well into next year and that they have put together a credible austerity plan to tackle their debt crisis. Market concerns that this may not be the case have led to recent falls in the value of the Euro. The Irish have resisted pressure to accept a bailout package from the EU, but did agree to work with the Commission to frame a potential bailout package should such a measure become necessary at a future date. Another meeting is taking place in Dublin between the Irish Government, European Commission, European Central Bank and IMF. It is also rumoured that the UK Chancellor will agree to the UK contributing to the rescue package if a bail-out agreement is arranged. Officials in Portugal and Spain have publicly urged Ireland to accept a bail-out to prevent the spread of financial uncertainty. In other European news this morning, construction output has dropped.

Other Currencies – Highlights

China has announced that it will take measures to control double digit inflation in the price of food. Details are in short supply, but the Shanghai stock exchange has lost nearly 10% of its value on fears that the government will increase interest rates as a means of controlling inflation. General consumer price inflation for October has risen to 4.4% from 3.6% the previous month. However, food price inflation has risen to 10.1% and has the potential to trigger public unrest if it goes unchallenged. For a live quote or to tell us about your foreign exchange requirements, please call us on +44 (0)20 7740 0000.