The Pound declined against the Euro and the Dollar yesterday on concerns that rising oil prices may derail the country’s nascent economic recovery. The clear divide amongst BoE policymakers has also encouraged investors to pare their bets that the Bank will tighten policy in March. Policymaker David Miles told reporters that officials should not rush to raise rates to prove they are “tough” on inflation as forecasts only warrant a “very gradual” tightening. Further weighing on the pound is a forecast of British retail sales for March predicting no growth.
The Dollar made small gains against the Pound while declining against the Euro as investors flocked to safe-haven assets other than the USD. While the Dollar has gained on heightened risk aversion in the past 18-months, skyrocketing commodity prices have the dollar on the defensive this morning. With oil production in Libya, Africa’s largest exporter of crude, beginning to slow as the country teeters on the brink of civil war, prices have spiked, topping $100 for the first time since 2008. With the inverse correlation between crude prices and the USD remaining largely intact, rising oil prices will likely continue to weigh on the dollar. The flight to safety has also prompted a fall in US Treasury yields, further reducing the greenback’s appeal as a higher-yielding alternative to other safe-haven instruments like the JPY.
However, the US economy continues to show signs of life with weekly jobless claims besting forecasts by falling to 391K from 410K last week, and better than the 405K expected. Durable goods orders also showed positive growth after last month’s unexpected decline. New home sales however missed the mark, falling to 284K, short of the 305K expected, and down from 329K last month. The house price index also took an unexpected step back, showing that prices declined 0.3% last month, highlighting the continued weakness within the housing market that is eroding US household purchasing power.
The Euro made gains against the Pound and the Dollar as oil prices surged yet again. A surprisingly strong reading of European economic confidence has also bolstered the common currency as the gauge increased to 107.8, the highest level since September 2007. German exports also showed strong growth, advancing 2.5% in the final three months of last year, beating expectations of a 1.1% gain.
German CPI increased by 0.5% in February after falling 0.4% last month, further supporting the recent hawkish tone from the ECB. However, with a particularly large issuance of Italian government bonds due today and tomorrow, and with investors shunning risky assets in light of continued unrest in North Africa and the Middle East, rising yields on government bonds in the PIGS has investors again worrying about debt default. As markets weigh rising commodity prices and uncertainty over the ECB’s forthcoming policy decision, the common currency will likely remain relegated to its recent ranges, albeit the higher end.
Data released 25.02.2011
UK 09.30 Revised GDP (Q4)
US 13.30 Revised GDP (Q4)
US 14.55 Michigan Sentiment (February Final)