The Pound made gains against the Euro while declining against the Dollar despite hawkish BoE commentary.
Andrew Sentance said that the recent slowdown in inflation may prove short-lived as the pound’s continued relative weakness threatens to push inflation above 5%, supporting his calls for an interest rate hike. “The UK is seeing more imported inflation than we would have if the pound was a bit stronger and therefore that’s reinforcing the squeeze on consumer spending” Sentance said. However, British inflation has now outpaced the BoE’s 2% target level for nearly 16 straight months, and yet the majority of BoE members believe that higher rates would do more harm than good. The pound will struggle to gain traction until a more definite outlook for British monetary policy is known.
The Dollar made gains against the Euro and the Pound on diverging economic reports. CPI registered in line with expectations, showing a 0.5% gain month over month. However, with the volatile food and energy components stripped out, the gauge fell flat with a 0.1% gain last month, short of the 0.2% expected. On an annualized basis, and without food and energy, the index is up a mere 1.2%, far from pressuring the Fed to move rates higher any time soon. A separate report showed manufacturing output in The New York area gained to 21.7, up from 17.5 last month. Industrial production jumped to 0.8%, besting the expected 0.6%, and up from last month’s 0.1% decline. Finally, U of Michigan confidence registered slightly better than expected at 69.6, up from 67.5 last month.
The Euro declined against the Pound and the Dollar on concerns that the region’s debt crisis is worsening. After a number of stories broke yesterday suggesting that Greece will likely need to restructure its debt in the coming months, Ireland has now also been added to short list of likely for default after a further credit downgrade by Moody’s. Further comments from German Finance Minister Werner Hoyer have investors fearing default, but he said that a Greek debt restructuring “would not be a disaster” and “Greece has done a tremendous job in reforming the country. Whether all this is enough, whether the results will be there soon enough, is a different question. We are looking at the economic developments, the fiscal developments in Greece, and we are worried.” Further compounding the euro’s woes are rumors that Eurozone member, Finland, may draw a line in the sand with Portugal and refuse to participate in any bailout loans. While expectations of higher yields will provide downside support for the common currency, it will struggle to post any significant gains with such an uncertain future outlook for the Eurozone economy as a whole.
Data released 18.04.2011
EU 15.00 Consumer Confidence (Flash – April)
US 15.00 NAHB Index (April)